Like many other folks out there, I'm worried about the dollar.
My fellow Fool Morgan Housel did a great job picking apart the issue of the budget deficit the other day, and his conclusion -- that entitlement spending is one of the two major issues we face -- is scary. Why? Because I have little hope that D.C. will find the political will to do anything worthwhile in that arena.
At the same time, we've had the Federal Reserve and Treasury pulling levers and prodding the economy with ultra-low rates and all kinds of different programs. Did they save our economy from collapse? I'll give that a definite maybe, but that doesn't mean that it won't be bad for our currency.
And don't even get me started on the U.S. trade deficit.
Yet I'm still avoiding gold
When inflation worries strike, gold is usually the first stop for concerned investors. It certainly has been a popular choice lately. While the S&P 500 has lost 27% of its value since the beginning of 2000, gold has darn near quadrupled.
But don't worry gold fans, I'm not going to claim that gold is overpriced. The current price of an ounce of gold is roughly 14.3 times the price of a barrel of oil, which is very close to the historical average ratio. That's not infallible proof that gold isn't overpriced, but it makes me at least relatively comfortable with the metal's current level.
So why don't I like gold? I don't like it because it's a hunk of metal that's not going to do anything for you except fight inflation. It doesn't pay a dividend, it doesn't have cute baby-gold offspring, heck, it won't even rake your yard. It's a lazy investment if you ask me.
But what about that ugly dollar?
If gold were my only choice to protect my portfolio, that'd be one thing, but there are plenty of other choices. Here are three places I'd rather put my money:
1. Commodity-producing companies
While I may not like gold itself, shares of gold-producing companies like Yamana Gold (NYSE: AUY ) , which offer both protection via their primary product and the potential for growth, could be a better bet. These aren't necessarily my favorite choices, but my fellow Fool Christopher Barker is always on top of the best choices in the gold group.
In the same vein, companies selling other commodities would also be a solid choice. There are tons of choices out there including major oil and gas players like Chevron and Total, natural gas specialists such as Chesapeake Energy (NYSE: CHK ) , and metals giants like Vale and BHP Billiton.
2. Foreign companies
If there's one thing that's sure to reduce a company's risk from a falling dollar, it's doing business in another currency entirely.
For investors who want to stick to stocks traded on U.S. exchanges, it's a little more difficult to find companies that do business exclusively in another currency. But that's not to say they're not out there. Among the large caps that do most or all of their business outside the U.S. are China Mobile (NYSE: CHL ) , Banco Santander (NYSE: STD ) , and Aluminum Corp of China.
3. Companies that have pricing power
In Berkshire Hathaway's (NYSE: BRK-B ) shareholder letter in 2007, Warren Buffett gushed about See's Candies, going as far as to call it a "dream business."
One of the enduring features of a dream business like See's Candies is that the company sells a product that has pricing power. That is, customers will choose See's over Uncle Jimmy's Yummy Chocolate Bits, even if Uncle Jimmy's is cheaper.
Unfortunately, we can't buy shares of See's Candies (because it's not a public company), and even if you pick up some Berkshire Hathaway stock, See's results account for very little of the overall financial picture. Investors can, however, pick up shares of other companies with pricing power. When you feel like a nice, cold can of Coca-Cola's (NYSE: KO ) classic beverage or a trip with your kids to a Disney theme park, is there really any substitute?
The point is that if inflation is your concern, look to companies that have the ability to raise prices and still keep customers coming back over and over and over again.
Editor's note: A previous version of this article understated Banco Santander's U.S. presence, which is relatively small but material. We regret the error.
Berkshire already owns See's Candies and shares of Coca-Cola. But are there stocks that Buffett only wishes he could buy? My fellow Fool Rich Greifner thinks so.
Berkshire Hathaway, Chesapeake Energy, Disney, and Coca-Cola are Motley Fool Inside Value picks. Berkshire Hathaway and Disney are Motley Fool Stock Advisor selections. China Green Agriculture and China Marine Food Group are Motley Fool Global Gains recommendations. Coca-Cola and Total SA are Motley Fool Income Investor picks. The Fool owns shares of Berkshire Hathaway, Chesapeake Energy, China Green Agriculture, and China Mobile. Try any of our Foolish newsletters today, free for 30 days.
Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway and Coca-Cola, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...