A Beginner’s Guide
To The “Multi-Currency Sandwich”
by
Gary Scott
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| There’s
a powerful investment strategy I call the “multi-currency sandwich” that
not only dramatically increases profit potential but can also add safety
to your portfolio. This tactic is almost unknown in the United States,
but is time tested and very popular in other countries.
I first learned
and cashed in on this strategy in the early 1980s when the United States
was being ravaged by inflation. The U.S. dollar had dropped strongly versus
the Swiss franc. It was possible to earn 18% on U.S. dollar CDs. When my
Swiss banker told me that I could use U.S. dollar CDs as collateral to
borrow Swiss francs at 3% and reinvest at 18%, I was hooked!
At that time,
for each US$50,000 CD I held, I could borrow the Swiss franc equivalent
of US$200,000 at 3%. I could then convert these francs back to dollars
and put them on deposit at 18%. My portfolio looked like the chart below.
Assuming the
Swiss franc-U.S. dollar exchange rate remained at parity, this strategy
increased the return on my US$50,000 investment from 18% to 78%. Yet the
investment became even better! The dollar then recovered about half the
value it had lost against the Swiss franc, so when it came time to pay
off the loan there was a huge foreign exchange profit as well. My total
profit was well over 100%.
Since I first
discovered this strategy, I’ve used it in many different currencies to
make gains of 30% or more annually, with relatively low risks given the
profit potential. And today, conditions in the currency markets make it
attractive again—in particular, low interest rates for loans in the Japanese
yen, versus much higher interest rates available in Eastern Europe.
For over a
decade, I’ve used the yen as a funding currency for multi-currency sandwiches.
I’ve been able to borrow yen at rates as low as 1.6% and reinvest the loan
in investments that have yielded up to 25%, sometimes making over 100%
per annum.
Because of
Japan’s great economic weakness, there wasn’t a big risk of the yen strengthening,
making repayment of the loan more expensive. Moreover, the Japanese needed
a weak yen to make it more attractive for foreigners to buy its exports.
A variety of
factors affect the value of the yen, and its value fluctuates. But for
the long term, when the yen is above 110 to the U.S. dollar, I feel it’s
too strong. Below 110, it’s too weak.
This simple
evaluation has helped me earn extra income time and time again. My best
recommendation was borrowing yen at 108 in 1994 (the yen was too strong)
and unloading when it fell to 146 (it was too weak). (For an example of
how I’ve used the yen as a funding currency for past multi-currency sandwich
recommendations, see http://www.garyascott.com
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Today, the
huge Japanese trade surplus with the United States would tend to make the
yen rise, but the Japanese government has so much debt that credit rating
firms have lowered its sovereign risk rating substantially. Plus, low Japanese
interest rates simply aren’t that attractive to foreign investors. So,
I’m not looking for a substantial strengthening of the yen against the
dollar anytime soon.
Here is a current
example of the opportunity available by borrowing yen at 1.75% and using
that loan to purchase other assets. In this example, half of the proceeds
of the loan are in Swiss francs. This currency has very different fundamentals
than the yen, but because Switzerland, like Japan, has an export-driven
economy, I don’t anticipate the franc rising much more in the short-term.
Interest rates on Swiss franc loans are also very low. Plus, having a second
lending currency provides downside protection if the other lending currency
(the yen) unexpectedly increases in value.
We take our
initial investment of US$30,000 and convert it into an Australian (AUD)
dollar investment in a BMW Motors bond. We then use this investment as
collateral to borrow US$600,000 in yen (JPY) and US$60,000 in Swiss francs
(CHF). We use the proceeds to purchase US$30,000 of bonds in Hungarian
forint (HUF); US$30,000 of Iceland treasury notes in Icelandic kroner (ISK);
US$30,000 of bonds in New Zealand dollars (NZD) and US$30,000 of bonds
in Polish Zloty (PLN). All of the bonds are rated AA or better. Please
see the chart at left for details.
If we were
to simply convert Japanese yen or Swiss francs into one of the higher-yielding
currencies such as the Hungarian forint at 11%, we would generate a decent
return of 7% or more a year. This isn’t bad, but with the multi-currency
sandwich we increase this return by four times to nearly 30% annually.
This is an
excellent return, but we must bear in mind the risks of the strategy. First,
the yen and Swiss franc could rise versus the invested currencies, although
I don’t think this is likely for the reasons that I’ve already explained.
Second, if interest rates rise the capital value of the bonds could fall.
This risk is fairly small because the bonds all mature in the next two
or three years, plus the interest rates in the currencies that we’re investing
in are already quite high. In addition, this risk is counter-balanced by
the fact that the yen and Swiss franc could fall in value versus the invested
currencies. This would increase the profitability of this portfolio. Finally,
because we’ve diversified our portfolio across several different currencies,
we really haven’t increased our risk that much. Indeed, in relation to
the risk of investing in the high-yielding forint, we’ve actually lowered
it.
However you
should view the loss potential seriously and not invest more than you can
afford to lose. Most international private banks can execute the multi-currency
sandwich trades I’ve described, but it’s a specialty of Denmark’s Jyske
Bank, one of The Sovereign Society’s recommended Convenient Account banks.
The minimum investment for the sandwich is US$30,000 and the total fees
for the transactions I’ve outlined would be about US$3,000 for the first
year. For more information, please contact Thomas Fischer, Jyske’s Head
of Client Services. Tel.: +(45) 33 787 812. Fax: +(45) 33 787 833. E-mail:
fischer@jyskebank.dk.
If you’d like
to learn more about multi-currency sandwiches and other profitable international
investment techniques I’ve learned in the nearly 40 years I’ve been doing
business internationally, be sure to read my free 15-lesson correspondence
course International Currencies Made EZ, at http://www.garyascott.com/currez/
index. html.
And, for up-to-the-minute
advice from the experts on the most profitable international investment
and business opportunities, I invite you to join Jyske Bank’s Thomas Fischer
and me for one of our “International Business Made EZ Courses.” The next
two are scheduled for November 5-7, 2004 (http://www.garyascott.com/catalog/ibezjefferson.html)
and February 4-6, 2005 (http://www.
garyascott.com/catalog/ibezecuador.html).
Gary Scott
has been an international economic writer and investment consultant for
35 years, with readers in nearly 100 countries.
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