Holding one’s assets in multiple currencies is a risk-minimization strategy that is common among the truly diversified investor. It is a strategy that simply makes sense. You will learn why currency diversification is a necessary part of a properly diversified portfolio. You will also learn why the Chinese yuan should be your currency of choice when choosing a foreign currency for diversification.
Don’t Put All Your Eggs in One Basket
You’ve all heard the old phrase, “Don’t put all your eggs in one basket.” Well, this phrase applies perfectly to currency diversification. If you hold all your savings, investments, and assets in a single currency, all your eggs are in one basket. Now ask yourself, what would happen to your assets if that basket were to break?
The future is unpredictable, and regardless of how unlikely it may seem today, a currency always has the possibility of losing value in the future. Hyperinflation or sudden monetary policies aimed at devaluing a currency can cut huge chunks out of your portfolio nearly overnight. And the worst part is that one person can’t do anything to stop or reverse these trends.
What one person can do, however, is take preemptive action. One person can take steps to ensure that, if something happens to a nation’s currency, their savings and investments won’t bare the entirety of this brunt.
Holding a portion of your savings in a foreign currency has other benefits as well. Let’s say that your identity is stolen, and the thief cleans out your bank accounts. Sure, you’ll probably be reimbursed for your losses, but how long will that take? Weeks? Months? A thief is less likely to steal money in a foreign currency, as it is of no use to them until they can convert it, which adds extra steps and extra chance of them being caught.
If you have any interest in purchasing real estate, investing in stocks, or doing any business in a foreign country, it makes sense for you to hold some of your savings in that nation’s currency. This will simply make business transactions faster and easier.
The Yuan as the Premiere Currency for Foreign Monetary Diversification
Now you’ll learn why the yuan should be your preferred choice for foreign currency diversification.
The U.S. dollar has long been considered the premiere currency to hold one’s assets in. The reasons for this include the stability of the United States, economically and politically. In addition, the U.S. dollar holds a special place in the world stage as the global “reserve currency” as well as the global “petro-currency.”
The Chinese RMB, more commonly referred to as the “yuan,” shares many of the same characteristics that make the U.S. dollar such an attractive currency. China is the world’s second largest economy. Despite the recent cool down, it still regularly out performs most Western nations in annual GDP growth. It is also a politically stable nation. Finally, while the U.S. dollar is considered the world’s petro-currency right now, that may be changing soon. This makes now the perfect time for one to store some of their wealth in yuan.
Recent moves in Beijing have led to speculation that the yuan may be on its way to becoming the next global petro-currency. This isn’t merely speculation; many reputable news sources have covered the possibility that China may begin using the yuan as a benchmark for international oil prices. It is even possible that oil may soon begin being traded in yuan.
And it’s not just China that is interested in establishing the yuan as the world’s petro-currency. Other major players in the oil industry are getting on board. One big name is Russia, one of the world’s largest exporters of oil. Venezuela has also expressed interest in the establishment of a petro-yuan. Although the nation may be experiencing political strife at the moment, that doesn’t change the fact that it still controls the world’s largest oil reserves. Venezuela backing the petro-yuan is a major step forward in some of this goal.
Keep in mind that China is currently the world’s top oil importer. This gives them the greatest market share of all the world’s oil importers. Combine this with China’s centralized economy, and it is very possible for the oil contracts to begin featuring prices in yuan in the near future. If the yuan does indeed become the currency of choice for oil transactions, or even a close second, this will greatly increase the demand for the yuan on a global scale. The currency will become more in-demand, and thus a smart move for someone looking to diversify and add security to their portfolio.
Diversification of one’s assets across multiple currencies is a hedge against risk that simply makes sense. Denoting all of one’s assets in a single currency is leaving one open to the shocks and waves of currency fluctuation. What’s more, holding cash in multiple currencies allows for business transactions in foreign nations to be significantly easier.
In considering what foreign currency to hold your cash in, the Chinese yuan is the clear choice. This currency is backed by the world’s second largest economy, as well as one of the world’s fastest growing. In addition, the very real possibility of the yuan upending the U.S. dollar as the world’s petro-currency means that demand for the yuan may skyrocket in the near future.