Right now, the lowering strategy is winning, and the lower U.S. dollar interest rate means that investors are likely to park their investments and savings in other currencies that pay higher returns. This reduces demand for dollars and means the dollar may fall even more against other currencies.

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This creates the perfect Multi Currency Sandwich position…an investment strategy that borrows a potentially weak currency at a low interest rate and invests the loan in a potentially strong currency at a higher rate of return.

The troubles of the U.S. dollar are so serious right now that one opportunity–unimaginable in the 1980s and 90s–is to borrow U.S. dollars to invest in Russian rubles!

Russian political stability looks strong with the new president Dmitry Medvedev assuming office. But Russia is facing many economic challenges, especially inflation. One way the Russian central bank will likely solve this is a revaluation of the ruble. This creates the potential for significant gain due to the interest rate differential between the ruble and the dollar…in other words, a “positive carry.”

My banker at Jyske Bank just offered a Bank of Moscow bond issue that matures in 2009. The bond has a coupon of 7.25%, but sells at a slight discount so the yield is 7.35% per annum. Because of falling interest rates in the U.S., Jyske Bank will lend you dollars for 4.5%. This means you make 2.85% positive carry by using Bank of Moscow bonds to borrow dollars.

For example, say that you invest $100,000 in the Bank of Moscow bond mentioned above. You earn $7,350 a year interest. If you use that $100,000 bond as collateral and borrow $200,000, your cost for the loan at 4.5% per annum is $9,000 a year.

You use the borrowed $200,000 to buy Bank of Moscow bonds, increasing your yearly interest income to $14,700, or $5,700 more than the interest cost of your dollar loan.

Now your total return on the $100,000 you originally invested is $13,050. Your Multi Currency sandwich has nearly doubled the return on your investment. Plus, since your Bank of Moscow bond is actually bought with and denominated in rubles, you stand to gain on any appreciation of the Russian currency as well. If the ruble appreciates 10%, your Forex gain would be $30,000…a nice bonus.

Fundamental fiscal conditions in the U.S. suggest that the greenback will remain weak. Economic conditions point toward continued low dollar interest rates. However, there is always a risk of reversal of rising interest rates and a stronger dollar versus the currency you invest in. I suggest using this technique only for mid- to long-range investment timeframes…five or more years. And never leverage more than you can afford to lose.

Gary Scott
For International Living

Editor’s Note: Gary has been dealing with bonds and currencies for almost 40 years. He never worries about the value of the dollar, or the recession as there are always currencies…and companies…that can weather the storm…even prosper…over the long term. To see how you can do this, too, read this special report.

Source: Safe Bonds with 7.35% Yield

The Masters of the World at Goldman Sachs repeated their claim that a ’super spike’ in the oil price could drive it to US$200, on the back of red-hot demand in the developing world and the “non-recession” in the U.S. Supply bottlenecks won’t help.

Take a look at the oil price chart below from Gabriel Andre.

What does it mean? Reading an oil price chart is not like reading a star chart. But it does require a little interpretation. Here’s ours: the increase in the oil price between 2001 and 2006 was a structural revaluation of oil’s value to the global economy. You had the Iraq war driving the geopolitical premium.

Since 2003, you’ve had production peaks/declines in large fields in Mexico and Russia, persistent disruptions to Nigerian production (Nigeria is the world’s eighth largest oil exporter at just over 2 million barrels per day, nearly half of which goes to the U.S.), and gradually increasing demand from emerging markets.

But what happened in 2006? The oil price chart shows that prior to 2006, the world had come to grips with the idea that the era of cheap oil was over. In May of 2006, commodities as an asset class suffered a large correction and investors worldwide reconsidered how long the resource boom would last.

It’s possible-although it would just be a guess-to attribute oil’s meteoric rise since early 2007 to rampant financial speculation. In a recent article, William Engdahl suggests that as much as 60% of the current oil price is speculation. On the other hand, a research note from Citigroup predicts oil prices of US$40/barrel within two years? Who’s right?

Frankly, the oil price is hostage to a number of variables, many of which are not quantifiable. A fear premium definitely exists. Then there is the declining U.S. dollar. And there is the matter of investors treating oil as an asset class and as a “safe-haven” from inflation. The creation of sector funds and ETFs correlated to the oil price has made this possible.

And now? Well, like iron ore and coal, the oil price indicates that the emergence of China and India as productive industrial economies with an emerging consumer class is a lot more resource intensive than any of us imagined.

The oil price chart above suggests there’s a bubble and that it has to correct soon. But by “correct” we mean oil between $95 and $105. In 2003, $40 became the new $20. In 2005, $60 became the new $40. And in 2008… $100 becomes the new $60.

Dan Denning
The Daily Reckoning Australia