Exotic currencies come under the category of “high risk/high reward” investments. Some would even say that they aren’t investments at all. They may be better termed as speculations, but ones that have the kind of upside potential that can’t be ignored. Let’s explore why you should add exotic currencies to your investment portfolio.
WHAT ARE EXOTIC CURRENCIES?
Currencies are the medium of exchange that trade within a nation. In the US, the dollar is the currency. Nearly every country in the world has its own unique currency. Some function not only as a means of exchange within the issuing country, but also between other countries.
These are what are often known as “hard currencies”, because they have recognized values. Hard currencies trade on international exchanges, as well as transactions between countries. Examples of hard currencies include the euro, the Japanese yen, the British pound, the Swiss franc, and the Canadian dollar. Other widely recognized currencies include the Russian ruble and the Chinese renminbi.
These currencies tend to have fairly stable exchange rates between one another. They often trade within a tight range. This comes about because major nations today often coordinate their economic and financial policies with one another. They may even maintain some sort of peg to one another. For example, the Chinese currency is at least loosely tied to the US dollar.
As a result of this coordination, investing in hard currencies often results in nothing more than very small gains and losses. Money can be made through arbitrage between currencies, but it usually happens with very large sums of money trading quickly. This is more of a trading strategy than an investment position.
At the opposite end of the currency spectrum are exotic currencies. These are so-called because they typically do not trade internationally, and are not used to settle foreign debts. The currencies are used almost exclusively as a medium of exchange within the issuing country.
HOW EXOTIC CURRENCIES CAN STRENGTHEN YOUR PORTFOLIO
At first glance, there’s a strong tendency to dismiss exotic currencies as an investment. They are, after all, speculative positions. In the normal course of events, there’s little chance of a major appreciation by an exotic currency against a hard currency, particularly the US dollar.
But that actually highlights the profit potential. Since these currencies have only minimal value, and primarily within the issuing country, the upside potential is far greater than the downside risk. The currencies have little international value because issuing countries are either viewed as unstable, or are facing chronic crisis.
This puts exotic currencies in a state of being investments that have nowhere to go up. We can think of them as being undervalued stocks, or more particularly, extremely undervalued. There’s virtually no mainstream investor interest in these currencies. That means that a selloff of the currency is almost impossible.
But the upside potential can be dramatic. For example, the Iraqi dinar represents a special opportunity. The country is politically unstable, wracked with violence, economically depressed, and with little international reputation beyond its oil production.
Yet there are events that could cause Iraqi dinar to rise in value in a way that few investments ever do. For example, there is speculation that at some point the currency will have a revaluation, at a higher value. Should that happen, the value of the currency will increase literally overnight.
Still another factor that can turn it into a positive investment is a sudden and dramatic spike in the price of oil. This could happen due to major geopolitical issues. If oil were to rise to well over $100 per barrel, the dinar could benefit with increased value. This is because Iraq is one of the world’s largest producers of oil, and has among the largest oil reserves.
THE RISKS OF INVESTING IN EXOTIC CURRENCIES
We certainly don’t want to paint an overly optimistic view of the profit potential of exotic currencies, and particularly of any specific one. To be sure, there are substantial risks with any and all exotic currencies.
1. A change in government. Should the government of the issuing exotic currency collapse, or be replaced through revolution, its current currency could become worthless. Any investment you have in the currency, no matter how small, will be lost. Currencies are sometimes replaced by new currencies, but that’s never guaranteed.
2. Exotic currencies are a long-term hold. It’s unlikely that you will make significant profits from trading exotics in the short run. More likely, you will have to adopt the buy-and-hold strategy. This will be necessary to enable certain events to take place, such as currency revaluation, or a significant change in economic or strategic circumstances for the issuing country.
3. War. An issuing country could be invaded by a stronger foreign enemy. Even if the conflict is ultimately resolved in their favor, permanent damage can be done to the currency.
4. Debt default. Nearly every country in the world maintains an international debt, including the US. Should the government of an exotic currency default on that debt, their currency could crash, or even become worthless.
5. No change in status quo . Not all struggling countries improve their circumstances. A country can literally go decades with little improvement. Should that be the case, the exotic currency could fail to see any measurable appreciation.
Finally, since exotic currencies are very thinly traded, what value it does have could collapse in the event that some major players were to begin dumping the currency in a rush to the exits.
HOW YOU CAN PROFIT FROM EXOTIC CURRENCIES
Exotic currencies of the type of opportunity that can return many times your initial investment. Because they are considered to be nearly worthless internationally, it’s possible that you can get something along the lines of a 10 to 1 or 20 to 1 return on your investment. That’s rare anywhere in the investment universe, and obtainable only among investments that are severely undervalued.
We’ve already given the example of the Iraqi dinar. Should the country begin to stabilize, around the time of a major spike in oil prices, it can provide such returns. This be particularly likely in the event of a significant disruption of the flow of oil. For example, should the supply of oil flowing out of the Persian Gulf be restricted for an extended period of time, the price of oil could explode. Iraq’s financial position would immediately improve, as well as its strategic value to the Western nations.
In that situation, the Iraqi dinar would be one of the very best plays on a major shift in international dynamics. The small position that it occupies in your portfolio could be a major contributor to investment profits.
HOW TO BUY EXOTIC CURRENCIES
One of the factors that makes exotic currencies exotic is the relative lack of availability. Typically, they cannot be purchased through major banks or brokerage firms. The better option is almost always the purchase them through recognized currency traders, such as Treasury Vault.
You can purchase exotic currencies on our web platform, using US dollars. We offer trading in more than a dozen exotic currencies, as well as hard currencies. You can purchase them in various denominations.
You can even create a portfolio of exotic currencies. Since the upside potential of exotic currencies is particularly strong, holding a portfolio of 10 or more could open you to the possibility of a dramatic rise in the value of just one or two. The gains you experience will enable you to more than recover losses in poorer performing currencies.
WHERE TO HOLD EXOTIC CURRENCIES
Since exotic currencies are a true long-term investment, one of the best ways to hold them is in an IRA. Treasury Vault can help you establish a self-directed IRA. The account can be used to hold gold, silver, and even real estate, in addition to your currency positions.
This type of IRA can represent a true alternative investment account. While you are holding other accounts that contain more traditional investments, like stocks, bonds, mutual funds and exchange traded funds, you could have a self-directed IRA that holds the type of investments that tend to perform best when mainstream investments are at their worst.
If you are a long-term investor – and that’s what you should be – adding alternative investments to your portfolio can strengthen resilience in a variety of different markets.
And when you decide to sell your exotic currencies, you can also do it through your Treasury Vault IRA. That makes holding exotic currencies as easy and convenient as any other type of paper assets.
HOW MUCH TO INVEST IN EXOTIC CURRENCIES
One of the big advantages with exotic currencies is that you don’t have to take a large position in order to make outsized profits. You only need to hold a sliver of your portfolio in the securities.
You should have a self-directed IRA that holds your alternative investments. That account may represent between 10% and 20% of your total portfolio. The remaining 80% to 90% should continue to be held in traditional investments.
But the portion held in your alternatives IRA should also include a healthy mix of gold and silver, and even real estate. Currencies should represent a small percentage of that IRA. For example, if the IRA holds 20% of your total portfolio, you might devote 25% of that account – or 5% of your total investment portfolio – to exotic currencies.
This will give you exposure to exotic currencies, and the profit potential that they hold. But at the same time, the allocation recognizes the inherent risks in the securities. Positions limited to 5% of your portfolio will put an absolute limit on your downside risk. As well, if you hold several exotic currencies in your IRA, you will be diversifying against the possibility of a serious decline in value in any single currency.
In the end, investing in exotic currencies is like any other type of investing. You have to spread your risk within the asset class. And you also have to diversify your asset classes. That means holding a portfolio with a healthy mix of stocks, bonds, funds, precious metals, and real estate – and a little bit of exotic currencies.
At Treasury Vault, we’re here to help make that kind of portfolio possible.