Marketplace

Special Drawing Rights

Question: Can an individual buy IMF SDR'S? If so, how? Thank you for considering my question. Willy, Medford, WI

Answer: Well, this is the first time I've ever gotten a question about buying the International Monetary Fund's Special Drawing Rights. That's why I couldn't resist answering it even though it lies on the financial fringe. The quick answer is no.

The SDR is a kind of currency unique to the IMF and its international dealings. The SDR was created in 1969, and its value is currently fixed according to a weighted basket of four currencies, the U.S. Dollar, the Euro, the Yen, and the British Pound. SDRs briefly moved out of international accounting obscurity into the global limelight last spring when the G20 ministers announced a dramatic increase in the amount of SDRs. The idea was to get the IMF to use SDRs as one more financial tool to combat the global downturn. There was also some discussion among international economics about turning the SDR into a global currency. It would supplant the dollar. Since then, however, the SDR has faded back into shadows of IMF accounting.

08/28/09 by Chris Farrell

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Buying gold

Question: What is the best way to add some gold to your investment portfolio? It is best to buy shares in a mutual fund, or just buy gold? Andrew, New York, NY

Answer: Gold has been on a tear lately. The price of the precious metal meandered for much of the summer, and then it moved sharply up in September. Gold futures closed at a record high today of $1,004.90 a troy ounce. (That's a "nominal" price record; adjusted for inflation gold reached a peak of more than $2,200 in early 1980.) There are all kinds of theories being batted around the world's largest chat room--the global capital markets--for the run up in gold. The most popular explanations revolve around the prospect of surging inflation in the U.S., worries about global deflation, buying by the Chinese central bank, falling mining production, a weak dollar--and all of the above.

If you're optimistic about gold, I would be wary about buying the actual metal. The metal is volatile. Gold doesn't pay dividends. It doesn't create cash flow. It costs you to store it.

There are intriguing alternatives. There are some exchange traded funds (ETFs) that are a cost-effective option for the individual investor, such as the SPDR Gold Shares ETF. A number of mutual funds focus on owning the precious metal and mining company shares, like the Van Eck International Investors Gold. Another approach is shown by the mutual fund First Eagle Global. A small percentage of its portfolio is invested in gold bullion. It acts like an insurance policy. When the equity markets go down, the price of gold is supposed to go up, cushioning the impact on the portfolio's value.

By the way, if your nervous about inflation here in the U.S. I still prefer Treasury bills and Treasury Inflation Protected Securities. These are investments that preserve capital and make you some money. No one will get rich with these securities, but the value of a dollar will be preserved. Still, if you want to invest a small percentage of your portfolio in gold, I'd investigate the mutual fund and ETF options at a website like Morningstar.com.
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09/11/09 by Chris Farrell

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A dollar collapse

Question: My husband's paranoid web sites are now predicting the collapse of the dollar by the end of the year. They say that other countries are no longer buying dollars and that the Fed is printing money like crazy to make up for the lack of foreign investment.

What do you think? If the dollar did collapse, what would that mean for the average citizen? Cheryl, Boulder, CO

Answer: The dollar has been weak in the international currency markets. At the moment, a weaker dollar has improved the competitive position of American exporters against their foreign rivals. I'm skeptical that we're seeing a "run on the dollar," however. For instance, the dollar rallied during the global financial crisis. The greenback is still the world's safe haven during times of trouble. So, some of the retreat in the dollar's value reflects a calmer mood among global traders.

I'm also in the camp that believes the Federal Reserve will be able to successfully mop up money in the aftermath of its extraordinary campaign to prevent another depression. It won't be easy or smooth, but I'm convinced the Fed is well aware of the problem ans has the intellectual and monetary tools to cope.

Still, the risk that the dollar will spiral sharply lower is there. We all know that the risk of catastrophe can't be simply dismissed simply because it's unlikely, not following the once "unthinkable" government takeovers of Fannie Mae, Freddie Mac, AIG, GM and Chrysler.

So, you asked what a dollar collapse might mean for the average citizen. Basically, it would be a disaster. My guess is that the financial markets would crater as financings denominated in dollars plunged in value. The price of oil and other critical commodities could skyrocket. Inflation would certainly take off. Americans would find it harder to borrow with the rest of the world wary of lending to us. After all, who wants to get paid back with depreciating dollars? Interest rates would sky rocket. The Federal Reserve would feel forced to tighten monetary policy to stem to panic. Trade wars could erupt. And so on.

Peter Coy of Business Week has a good article directly looking into your question, What Happens if the Dollar Crashes. You can read it here.

11/03/09 by Chris Farrell

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