One Stock That's Better Than Gold

My colleagues Tim Hanson and Brian Richards have done their best to scare you about a falling dollar. And with the articles behind headlines like "Get Out Now!" and "Read This Because the Dollar Is Doomed," they've made their point.

Of course with other headlines in the financial press -- like "Dollar on Weak Footing" and "U.S. Dollar's Queasy Slide" -- it's no wonder people are concerned. That anxiety ramps up even further when you consider that the U.S. government has been printing greenbacks at a tremendous rate, both to bail out otherwise worthless companies and to stimulate the economy. That's got to be inflationary at some point.

Supporting this, luminaries such as bond master Bill Gross, Swiss banker Konrad Hummler, and commodities expert Jim Rogers have all expressed concern about the dollar.

Cue the infomercials
In reaction, many would have you invest in gold, which has of course racked up huge price gains. After all, gold is supposedly "safe." But when you see ads on TV urging you to convert your jewelry and other sources of gold -- dental fillings? Really? -- into cash, doesn't that point to a possible bubble in gold prices? I mean, aren't those ever-present ads similar to all those shows on how to buy and flip houses during the inflating of the real estate bubble?

Yes, gold is considered safe, but is buying into a frothy gold market really the best way to protect your dollars? After all, gold doesn't grow earnings or pay you a dividend while owning it.

There are other ways to protect your portfolio against a falling dollar -- ways that need not be driven by fear. Unless you want to get into the intricacies of foreign exchange trading, the answer is pretty simple. Invest in companies that generate a large part of their revenue abroad. As the dollar falls, those foreign revenues are converted into more dollars. Your investment will grow from both increasing sales and higher conversion rates.

A better hedge
Consider the following companies, each of which generates at least half of its revenue outside of the United States:

Company

Market Cap,
(in Billions)

Revenue (TTM),
(in Billions)

% Revenue Ex-U.S.

Philip Morris International

$82.0

$25.9

100%

Nokia (NYSE: NOK  )

$36.7

$41.2

95.8%

Intel (Nasdaq: INTC  )

$115.0

$38.3

85.0%

Transocean (NYSE: RIG  )

$17.3

$11.0

80.6%

Corning (NYSE: GLW  )

$26.3

$6.0

73.3%

ExxonMobil (NYSE: XOM  )

$281.8

$301.3

67.4%

Procter & Gamble (NYSE: PG  )

$176.8

$80.4

60.7%

Oracle (Nasdaq: ORCL  )

$111.8

$24.2

56.2%

Source: Capital IQ, a division of Standard & Poor's.
TTM = trailing 12 months.

None of those is a surprise, really.

Nokia sells tons of cell phones worldwide, Intel's chips are in the majority of the world's computers, and it's not just Americans who like flat-screen TVs with panels made by Corning.

Exxon feeds gas needs around the world and the Gulf of Mexico is hardly the only place Transocean is operating its rigs, though we all hope they've double-checked their safety protocols in the past month.

Oracle's database products are used by companies all over, and many people with hair need shampoo from P&G, which is hardly all it sells. And they could all be big investment opportunities, given the right conditions.

But the one company on that list that I believe would do the best at hedging your dollar risk doesn't bring in a penny here in the States: tobacco giant Philip Morris International. It has the leading market share, the No. 1 brand, and pays a very respectable dividend of 5.2%.

Sure, gold can be used to preserve your dollars, but only if you get in at the right point. Right now, however, I'd be worried about buying too high, especially given the speed of its rise in price. Investing in a company with a majority of its revenue and earnings abroad, however, also protects you against a falling dollar.

In addition, you'll have the opportunity to participate in its further growth, and you often get a dividend to boot. That's better than gold, in my mind. Other than relying on nervous people to bid up its price, the shiny yellow stuff doesn't do much to grow its value.

Of course, Philip Morris might not be your cup of tea. That's OK. There are plenty of other internationally focused companies growing earnings and value. Each month, Motley Fool Global Gains brings you two of them. If you're serious about divesting away from the risk of being all-in with the dollar, and looking for something other than gold, consider a free 30-day trial. There's no obligation, and you get to see the team's best stock ideas. Simply click here to read all about them.

Already a member? Sign in here.

This article was originally published Nov. 30, 2009. It has been updated.

Jim Mueller owns shares of Philip Morris, but has no interest in any other company mentioned in this article. Intel and Nokia are Inside Value selections. Philip Morris is a Global Gains recommendation. Procter & Gamble is an Income Investor selection. The Fool has created a covered strangle position on Intel. The Fool owns shares of P&G, and owns shares of and has written puts on Oracle. Motley Fool Options has recommended a buy calls position on Intel. The Fool's disclosure policy may glitter like gold on the surface, but underneath, it's pure platinum.


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  • Report this Comment On May 26, 2010, at 8:10 AM, XMFSinchiruna wrote:

    I have made this point before, but for the record, those infomercials referred to above are seeking to buy peoples' gold, which can not reasonably be taken as an indication of froth. There are also commercials looking to sell gold and silver, but this from a baseline where there had been zero such ads prior to the beginning of the bull market. In any event, this is a quaint anecdote swimming against a torrent of qualitative evidence supporting forecasts for continued strength in gold.

    I'm not averse to cautionary tales about gold, especially as they relate to volatility, but I can not abide by comparisons between an honest currency like gold, and a debt-fueled, legislatively reinforced, Fed-endorsed, fatally leveraged real estate market.

    Finally, gold investors can indeed find both earnings growth and dividends by dividing their precious metals allocation between quality miners and reliable bullion proxies.

    It's not a question of gold versus stocks ... investors can certainly opt for both. Likewise, there are plenty of ways to discuss stocks in a positive light without maligning gold.

  • Report this Comment On May 27, 2010, at 1:41 PM, TheDumbMoney wrote:

    TMFSinchiruna, we have of course tangled in the past, and will again. As I have said before, your certainty is messianic and off-putting. Your tenacity is admirable. But gold is only a currency if you convince enough people that it is a currency. Just like dollars. Just like Euros. Just like seashells, which some ancient cultures used as currency. Many cultures have used no currency, but subsisted on barter. Many ancient cultures used all kinds of metals other than gold or in combination with gold as a currency. No matter what one uses as a currency, a currency is always just a place-holder, dependent upon trust, because you cannot eat it (except that some cultures have at times used seeds as a currency), and you cannot kill with it (except that guns were for a time used as currency in the American west), and you cannot milk it (except that some cultures have used cows as currency, particularly as included in dowries; currency for marriage), and you cannot use it to fabricate goods. Deep in your heart and in your brain, you know all of that, which is why I suspect you try so hard to convince everyone you see that gold is a currency in some sense fundamentally different from all others. It is not; it is all perception, as with gold, as with anything else. Note, too, that if the U.S. were to return to a gold standard, it would be just as "legislatively reinforced," to use your words, as our present system. Nor did the gold standard work particularly well itself, when we were one it. Gold could easily double or triple in value from where it is now, for any number of reasons, and could dive again, but I do not think that means it is fundamentally different from anything else humans have ever dreamed up to use as a currency. I see you have had significant success convincing many people otherwise, and I only hope for their sake that gold does go up, up, up, for whatever reason.

    Also, wouldn't you rather have quantitative evidence, rather than "qualitative evidence" supporting your forecasts? I certainly would.

  • Report this Comment On May 27, 2010, at 5:25 PM, XMFSinchiruna wrote:

    dumberthanafool,

    You're all over the place. I said nothing of a gold standard, and 'legislatively reinforced' referred to the real estate market.

    You're mistaken about currencies: gold has never ceased being a currency, so its status is in no way dependent upon how many people become convinced of anything. Gold is not "becoming" currency ... it is currency.

    You're also wrong about gold not being fundamentally different from fiat currencies. If you understood gold and currencies, you would not argue such a baseless proposition. If you can ascertain that difference, you might begin to understand gold.

    "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the

    way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

    - Alan Greenspan

    "Gold still represents the ultimate form of payment in the world. Germany in 1944 could buy materials during the war only with gold. Fiat money in extremis is accepted by nobody. Gold is always accepted." - Alan Greenspan

    "Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice."

    - George Washington

    "It is from Great Britain we copy the idea of giving paper in exchange for discounted bills: and while we have derived from that country some good principles of government and legislation, we unfortunately run into the most servile imitation of all her practices, ruinous as they prove to her, and with the gulph yawning before us into which those very practices are precipitating her. The unlimited emission of bank-paper has banished all her specie, and is now, by a depreciation acknowledged by her own statesmen, carrying her rapidly to bankruptcy, as it did France, as it did us, and will do us again, and every country permitting paper to be circulated, other than that by public authority, rigorously limited to the just measure for circulation."

    Thomas Jefferson

  • Report this Comment On May 27, 2010, at 9:08 PM, TheDumbMoney wrote:

    Sincherdoodle, your argumentative style is questionable. "If you understood gold and currencies, you would not argue such a baseless proposition."

    Woo! Are there people on this site who are actually moved by such un-supported ad hominems?? Do you even realize that in your childish diatribe, before you start quoting people, you give zero basis for your (repeated) claims that I don't understand what gold is? Your entire argument, repeated a few times is, "you just don't get it." You sound like a North Korean propaganda broadcast. It's eerie.

    Also, I don't care how many people you quote. I think Alan Greenspan is an out-of-his-gourd Ayn Randian nut who masked his libertarian extremism too well for all our good. Also, I think your quote of him is from the 1960's, and he later expressed vastly more confidence in the "fiat money" system, significantly, by running it for over a decade.

    Jefferson, a great man in many ways, but of course was opposed to pretty much all banks, and to any deficit-spending of any kind; he was also an agrarian utopianist who advocated extreme states rights, opposed any women's suffrage, and fathered a bunch of children by one of his slaves. I'm delighted by all he did for our country, but by no means think he is a god of monetary or practical understanding.

    As for Washington, in that letter, which you quote, he also said: It "probably belongs to no one man existing to possess all the qualifications required to trace the course of American commerce through all intricate paths nor to those and only those that shall lead the United States to future glory and prosperity."

    That quote indicates that Washington had humility you do not have, even though he had vastly less reason to have such humility.

  • Report this Comment On June 01, 2010, at 7:48 AM, XMFSinchiruna wrote:

    dumberthanafool,

    Although your replies are occasionally clever, the insulting undercurrent detracts from the effectiveness of your argument. Would that you had kept the conversation from getting personal (right from the first line of your first reply), and focused instead upon engaging in civilized debate, this may have spawned into an interesting conversation.

    Going back to your first comment ... In no way is the onus upon me to wholly reconstruct the entire rationale for further strength in gold with every comment I make. I see that you are a new member. I encourage you to walk back through the rich archives of prior articles, blog posts, and fascinating discussions with fellow Fools that have collectively constructed the bullish case for gold over the past several years.

    I do encourage you to continue your efforts to appreciate the nature of gold. You are correct that any medium of exchange must be agreed to by both parties of a transaction, but that does not make every currency selection an arbitrary one. There is a history, a constancy, and a universality to gold's use as a currency that no other medium can lay claim to. You seem to be focusing on ways in which gold and paper currencies are similar, in that both are forms of money (that's about where the similarities end), but I encourage you to further explore the nature of their differences. Unbacked fiat currency is demonstrably -- and indeed fundamentally -- different from gold, since gold can not be subject to impairment and depreciation by debt as fiat currencies can.

    Approach me with the respect that makes this community such a special place, and you'll find I am most willing to engage in friendly, open-minded discussion of these important and complex topics.

    Fool on!

    Oh, and for the record, that second quote from Alan Greenspan is from 1999:

    "Gold still represents the ultimate form of payment in the world. Germany in 1944 could buy materials during the war only with gold. Fiat money in extremis is accepted by nobody. Gold is always accepted." - Alan Greenspan

  • Report this Comment On June 02, 2010, at 12:35 PM, TheDumbMoney wrote:

    I do not expect you to reconstruct the justification for gold in every comment you make. I do expect that when you attack my position you provide more than a "you just don't get it" repetition and a few quotes. That would satisfy my personal definition of "open-minded discussion of these important and complex topics." Or perhaps we can just both throw stones from our respective glass houses. However, I have read your archives, and looked at your blog, and read many of your posts (and commented on quite a few of them). Nor, based on that, do I think it is overly personal and insulting for me to have concluded that you very often function more as a high-conviction salesman (I'll put it that way, if you prefer), than as a purely objective analyst. Functionally, too, in my personal view, in your analysis you have often treated the "...in extremis...," from a quote like Greespan's, as superfluous verbiage rather than as a highly meaningful qualification. Thus, and relatedly, you demonstrate a near-absolute aversion to so-called "fiat currency" that elides the meaningful distinctions between, say, the United States and Zimbabwean (may it rest in peace) dollars. That, to me, betrays a lack of macroeconomic understanding as to why some "fiat currencies" hyperinflate, or otherwise collapse, and why some do not. In none of your posts or articles have you ever managed to provide an adequate (to me) explanation for why things are different now for gold, i.e., why it is so secure and wonderful today, when it had to be abandoned as a currency standard, for example; or why the circumstances of today's world are any more postive for gold than they were in, say, 1945; or why it is such a great investment just because it has risen so strongly in the last ten years, when true long-termers, those who have held it for thirty years (instead of, say, holding BRK.A stock), are looking, still, even after this decade's massive rise, at one of the very worst inflation-adjusted investments they could have possibly made in 1980, aside from EK, GM, or XRX stock. (In fact, it is an interesting fact in general that gold has underperformed so significantly over a 30-year period, despite the constant inflation of our ridiculous fiat currency.) All I see from you is a good story, i.e., a very good case for short-term speculation over the next two or five years. Finally, it is not just with me, or in responses to me, that you fail to provide real explanations. Take this, from your original comment above: "...those infomercials referred to above are seeking to buy peoples' gold, which can not reasonably be taken as an indication of froth" Really, it cannot? Why? You don't say, TMFSincheruna. I would say it absolutely could be taken reasonably as just that, even if it could be taken reasonably as not signifying froth. If I start seeing a bunch of commercials about people willing to purchase my old socks, I'm going to take that as a reasonable indication of froth, even if it starts from a baseline of zero. I live near a major shopping street in a nice neighborhood in a major city. There a store just opened within the last six months, with fake gold plating all over it, and all it does is "buy and sell" gold and gold investments. Could that not reasonably be taken as an indication of froth, either? Please. What I object to is your certainty that it could not be, coupled with your failure to provide a reason why. You have a reasonable argument in gold's favor, particularly as I said, as a speculative investment over the next two to five years, but it is by no means airtight, and I truly think you stretch into dangerous territory when you argue so strenuously for semi- and un-professional investors on this site to get into gold or up investment in gold, particularly as a long-term value investment. That is because the other, quite perfectly reasonable (no matter what you say), argument is this: the same easy "fiat" money and/or speculative ferver that fueled ridiculous speculation in stocks, particularly internet stocks, in 1998-2000, and that, once-burned there, was transferred into housing (and art, less famously) from 2002-2007, has now, since-burned in both those places, transferred again, and has now fueled exactly the same sort of speculation in the new "different" thing: commodities, particularly metals, particularly gold. You can disagree with that, and that's fine. Just don't ever tell someone it's an unreasonable reading. It is not just the reading of this poor stupid new fool. It is the reading of some of the finest investment minds in the country. It may be wrong, but it is not unreasonable, and to say otherwise, and to actively seek to convince other people not just that your view is reasonable, but that such views are unreasonable, is dangerous.

  • Report this Comment On June 02, 2010, at 1:20 PM, TheDumbMoney wrote:

    I would add I also find some fault with the original article. It is just meant to be a quick piece, but potentially betrays a fault I have sometimes displayed as well: we Americans are significantly better at seeing the flaws in our own system than in seeing the problems others face. (The photo of Jane Fonda sitting astride Viet Cong artillery in Vietnam is but one of the most famous examples.)

    I'm a big believer in PM as well. But specifically, relative to the U.S. dollar, other currencies (e.g., Euro, Yen) potentially face even greater long-term problems. Thus, any use of PM as a stability "hedge" can actually become a risk amplifier when things happen like what has happened in Europe in the last month. That is obviously because devaluation of the Euro, for example, makes the profits PM makes there worth less in U.S. dollars, once converted, and can reduce PM's stock price. This is a problem because devaluation of other currencies relative to the dollar may well continue, at least in the next ten years (or may not).

    Additionally, the article misses the fact, as I have in the past as well, that PM engages in significant, very sophisticated internal currency hedging activities of its own, likely for this very reason. If one is going to call PM a great hedge, one needs to discuss this, because it somewhat mutes PM's value as a pure hedge against a falling dollar, even as it smooths PMs currency risks more generally.

  • Report this Comment On June 02, 2010, at 2:44 PM, KerrisdaleCap wrote:

    The spread between TIPS and treasuries implies an annual inflation rate of only 2% over the next 10 years. If anyone's interested, we wrote about it here: http://kerrisdalecap.com/commentary/?page_id=107&pid=131

  • Report this Comment On June 02, 2010, at 9:22 PM, silverminer wrote:

    dumberthanafool,

    Okay, I am shedding any defensiveness to your still-unwarranted mischaracterizations of my work, and I am prepared to continue in an open dialogue of our disparate macroeconomic perspectives.

    Permit me to begin by stating that I enjoy your writing style, and respect the obvious intelligence behind it. I look forward to a challenging debate.

    I do not enjoy the luxury of ample spare time, so please understand if I can not sustain the dialogue ad infinitum.

    I get that you found my first reply dismissive, and for that I apologize. I may have been on the defensive, having received your first comment as something of a personal slight.

    The last thing I will say on a personal level before moving on is that I consider it inaccurate to characterize me as some sort of salesman. If you knew me personally, you would find that I have a genuine concern for the financial well-being of my fellow investors who may lack the protection that gold and silver provide from the currency devaluation that I consider inherent in current fiscal policy. I do indeed feel certain about my forecasts for continued strength in gold and silver prices (at least to the conservative targets I have espoused), and for that I will not apologize ... but that certainty is born of careful and sustained research conducted over the course of many years, and it remains constantly subject to objective analysis of macroeconomic events as they unfold. I am fully invested according to my outlook, but I am not blindly married to the thesis. If the outlooks for the U.S. dollar and the Euro improve materially, I am more than ready ... and in fact would be delighted, to alter my forecast and embrace increased fiat currency exposure. I do not see that as likely, but I remain open-minded and procedural in my approach. If you have read many of my posts, then surely you will have encountered the dozens of occasions on which I have explained that I truly would rather be wrong about everything I have written -- and be thereby completely discredited, ridiculed, etc. -- if it meant that we as a people could be spared from the sustained stagflationary depression and ruinous currency debasement that I have submitted is the destination at the end of the road we now stand upon.

    With that said, let us now place personal matters aside, and efficiently get to the meat of whatever topics you would like to discuss relating to gold.

    Let's begin with your mention of the "in extremis" qualifier in Alan Greenspan's quote. His post-chairmanship quotes, while admittedly intriguing given the source (and therefore a convenient didactic tool), are not required in order to construct the bullish case for gold. Since you focused on that particular phrase, let's discuss it. In my view, the noteworthy devaluation of the U.S. dollar that has accompanied the present multi-year bull market for gold ran smack into a credit crisis and momentary deleveraging event that ultimately led the Fed and treasury to issue many trillions of dollars in debt guarantees, swap lines, economic stimulus, and unprecedented policy tools in an all-out blitz to stem the deleveraging and forestall what I have repeatedly argued remains an unavoidable deleveraging of the $600+ trillion notional market for derivatives. The dollar was already severely stressed (debt-impaired) prior to the crisis by the incredible acceleration of deficit spending undertaken under the reign of Bush, but it is primarily through the collective responses to the crisis that the condition of the U.S. dollar was heaved into a state of "extremis". Presently, the world's focus has shifted to the Euro, as that currency's acute trouble has created an illusory bump in the USDX ... but fundamentally the outlook for the dollar has only continued to deteriorate.

    Even the official (conservative) deficit forecasts place us on a clear path to 100% debt/GDP (by 2014 according to the IMF), and ever since the interventions began the major holders of US debt have expressed their deep concern about the sustainability of these policies. At issue, ultimately, is the finite global appetite for the still forthcoming mounds of Treasury debt, and the distinct resulting likelihood of additional quantitative easing. Alongside their reluctant support of massive Treasury auctions, you'll note that already several key central banks are taking noteworthy steps to increase their allocation to gold within their respective foreign reserve holdings.

    Furthermore, you'll note that Greenspan used "in extremis" only to qualify the portion about fiat being accepted by nobody, whereas he made no effort to qualify the phrase: "gold is always accepted".

    I do not seek to conflate the events that took place in Zimbabwe with the dollar's predicament. As the below-linked blog post will demonstrate, I maintain a careful restraint from seeking cookie-cutter fits between the present crisis and historical case studies. Additionally, the brand of stagflation that I have offered as the most likely outcome of our present path is materially distinct from Zimbabwe's hyperinflationary experience.

    http://caps.fool.com/Blogs/ViewPost.aspx?source=isesitlnk000...

    To the following question of yours, I have indeed treated this topic thoroughly on multiple occasions, but i am happy to do so again. You noted:

    "In none of your posts or articles have you ever managed to provide an adequate (to me) explanation for why things are different now for gold, i.e., why it is so secure and wonderful today, when it had to be abandoned as a currency standard, for example; or why the circumstances of today's world are any more postive for gold than they were in, say, 1945; or why it is such a great investment just because it has risen so strongly in the last ten years, when true long-termers, those who have held it for thirty years (instead of, say, holding BRK.A stock), are looking, still, even after this decade's massive rise, at one of the very worst inflation-adjusted investments they could have possibly made in 1980..."

    I do not believe that gold "had to be abandoned" as a currency standard. What I do believe is that Keynesian theory emboldened bankers and policymakers to choose to abandon sound money in order to clear the way for synthetic recovery through accelerated deficit spending. Then, as now, standing by to permit a systemic unwinding of excess leverage is a politically challenging prospect as compared to the seemingly easy fix of deficit spending. Political expediency and fiduciary conservatism rarely go hand in hand, which I maintain is precisely why so many of history's inglorious experiments with unbacked paper currency have ended in failure.

    I don't believe I have never compared today's environment for gold to 1945, so I will leave that one alone for now, but I'm glad you brought up the 1980 timeframe. This is a favorite tactic of those trying to argue the pitfalls of gold, but I think on further consideration you'll agree that cherry-picking a momentary all-time high as a hypothetical starting point for gold investors to compare with equity performance is a rather loaded comparison. Had I been writing at the time, I would have been boisterously advocating the liquidation of gold holdings as Volcker progressed that far with his campaign of interest-rate hikes. In other words, anyone who may have been buying gold in 1980 when the Fed rate reached over 18% was themselves lacking a basic understanding of which conditions are favorable to sustained pricing strength. The conditions today are completely different, and indeed we have a zero-bound rate that shows no signs of imminent or meaningful movement. One principle distinction lies in the fact that aside from the abrupt inflationary bout, other aspects of the American economy remained relatively strong in the late 1970s ... which is what permitted Volcker to raise rates so aggressively without touching off a deep recession. Today, the Fed has no such luxury, so their hands will remain substantially tied even once reduced demand for U.S. debt results in inflationary pressure.

    Let me clarify one other point from that portion of your reply. I do not view gold as an investment. Stocks are investments, and I always direct those looking to profit from the gold's bull market to focus upon the shares of miners. The role of bullion exposure within an investor's allocation is different ... it is one of capital/wealth preservation. It is, I believe, a key alternative to what for most investors had become a default selection of treasury bonds as a safe haven. But when shelter from dollar devaluation is required, treasuries offer no protection. As a replacement for that type of allocation I consider gold or silver bullion exposure ideal under the circumstances. Whereas under normal conditions investors will park a portion of their non-equity liquidity in some combination of cash and treasuries, I am simply advocating for some room to be allotted to gold bullion. I always leave allocation up to the individual, so it's not as though I'm advocating that people go all in on gold bullion and nothing else ... not by a long shot.

    Which brings me to the most important point that I'd like to make in response to your quoted passage above. I am constantly forced to repeat this, through no fault of your own. And this was central to my original reply to the author of this article: it is not a question of gold versus stocks!! I am an investor, and I invest in stocks. The fact that I have personally selected a portfolio for myself that's heavily weighted in mining and energy shares is a separate topic for discussion, but the point is that I am not heavily allocated in bullion.... and I do not espouse the replacement of equity exposure with gold. Gold and equities can co-exist peacefully within any investor's portfolio, and allocation, as I said, is always a matter of personal choice. Therefore ... and I want to say this loud and clear, once and for all ... performance comparisons between gold bullion and stocks are not only rigged when they invariably select 1980 as the standard starting point, but they present a blatant red herring in that investors are neither forced nor recommended to choose one over the other.

    Old-school asset allocation models used to recommend 5-10% gold bullion exposure as an effective hedge against periodic weakness in equities ... since gold prices have indeed exhibited strong non-correlation to equities over time. I have lightly suggested that 5-10% bullion exposure may be a little conservative under the circumstances, but there again I have always been clear to construct discussions of allocation as a matter purely of personal selection.

    On the flip side, no one arguing against gold exposure has ever adequately explained to me the source for their vociferous disdain of the metal as a viable currency alternative. Over the many years that I have been studying the gold market and correctly forecasting the continuation of this bull market, no one has ever offered to me a convincing argument for how the conditions that precipitated gold's ascent could have reversed to the point where they would come to anticipate gold's imminent collapse or decline. I have seen plenty of misguided attempts to frame explanations for gold's rise in sole terms of human psychology (i.e. "the fear trade") and other fully debunked efforts to suggest that gold is a bubble waiting to pop, but none of those arguments has ever held up to the scrutiny that I have brought in response.

    Lastly, and please do not interpret this as self-satisfaction, even my harshest critics will concede that I have been on the right side of the gold and silver bull market from the inception of my time with this community in mid-2005. My track record over several years time is there for all to see, and it goes beyond simply parroting an unsophisticated message of gold's uninterrupted rise. When the monster correction began in march 2008, I was a lone voice here speaking to the ultimate resilience of this bull market and interpreting the "crash" as nothing more than a correction. I could not possibly tally the number of occasions on which I had to challenge the notion -- widespread during that time -- that gold had reached its zenith. Subsequently, I have identified two major directional shifts in the gold price precisely on the eve of those respective shifts, and most recently I accurately identified the scope of the present corrective pause from the latest high near $1,250. Despite these successes in near and medium-term calls, I am quick to point out that no one be 100% certain of price trajectories on those time horizons. Where I do think certainty is possible is in the broader macroeconomic picture.

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=393025&t=0...

    http://www.fool.com/investing/general/2009/12/04/easy-does-i...

    http://www.fool.com/investing/general/2009/11/13/are-you-rea...

    http://www.fool.com/investing/general/2009/09/02/the-next-mo...

    At some point, the topic of price manipulation by the bullion banks has to enter into the conversation, but that's a topic for another day. I have conducted considerable research into this topic, and am attempting to convey the results of this endeavor with Fools so that they can better understand the source of my certainty in my $2,000 price projection for gold. Just as paper money is not the same as gold money, paper gold is not the same as actual physical gold. When the market forces that distinction to be made, we will most certainly have a price explosion that forces the institutional shorts to cover under duress. There will not be nearly sufficient physical supply to satisfy demand for bullion, and prices will rise substantially.

    Add to all of these considerations the persistent weight of frozen derivatives hidden away at mark-to whatever-you-want valuations within fraudulent corporate balance sheets, all ordained by a ratings industry that remains a model of opacity, sprinkle in a little of the underfunded pensions and functionally insolvent municipalities across the nation, layer on the scores of states that are facing unbridgeable budget gaps, and toss it all together with a consumer-dependent economy that hardly makes anything productive anymore ... and you start to amass the recipe for strongly higher gold prices in a sustained multi-year bull market event that will conservatively surpass the $2,000 mark.

    On a different topic, you'll have to be the one to explain to me how the existence of a company that wants people to part with their gold at pennies on the dollar can reasonably be construed as an indication of froth. Understanding the laws of supply and demand as I'm sure you do, surely you will concede that the willingness of people to part with their gold for pennies on the dollar is an indication of widespread cluelessness about both the value of their gold and the reasons to hold onto it. I'm not saying that there are not other commercials on TV that one could (I believe mistakenly) interpreted as the beginning signs of froth, but those Cash4Gold ads are not a reasonable example thereof since they illustrate just how few people (still) are interested in participating in the gold bullion market or might even understand why they might wish to.

    True expertise on gold is not very widespread. Although I remain extremely humble with respect to veteran figures like Jim Sinclair and Jim Rogers, I have amassed sufficient expertise on the topic to identify those whom I strongly believe misinterpret the gold market in fatal ways. You can label me as messianic and off-putting if you wish, but I am, for example, 100% convinced that Nouriel Roubini is completely off base when it comes to gold (see below).

    http://www.fool.com/investing/general/2010/01/04/nouriel-rou...

    You'll have to identify by name some of those "finest investment minds in the country" that consider gold and overblown speculative bubble akin to the real estate market before it. Chances are, they are some of the very same people who have struggled to explain gold's relentless ascent throughout the past decade, and likely many of them have issued similar characterizations at $400 gold, $600 gold, $800 gold, $1,000 gold, and now again at $1,250 gold. Certainly, some highly regarded individuals have called for the collapse of gold prices at each of every subsequent pause in the bull run. And yet, despite that lengthy graveyard of failed calls for successive tops in gold, many gold bashers continue to exhibit the same confidence in gold's imminent demise that you seem to find to off-putting in my confidence in gold's sustainable strength. I won't tell people that it's unreasonable to characterize the commodity bull market as a baseless speculative bubble primed for a calamitous decline, but I will certainly let them know that I think they have it all wrong ... and I will not be shy about explaining why that is. Whether they choose to consider my perspective is up to each individual, and only time will provide the final arbiter of whom is correct and whom is incorrect about the breadth and sustainability of this bull market.

    Everyone is entitled to their opinion, and no opinion is dangerous except when it is followed blindly without regard for independent analysis or due diligence. I sharply rebuke any claim that my opinions are dangerous, or that it is somehow any more dangerous for me to recommend gold or gold stocks to investors as it is for anyone else to recommend whichever stocks or assets they may have confidently concluded to represent an uncommon opportunity.

    I hope you appreciate the time I have put into this response, and trust that you will respond in kind with a sincere and open discussion of these very important topics.

    See you at $2,000 gold. ;)

    Fool on

  • Report this Comment On June 02, 2010, at 11:55 PM, XMFSinchiruna wrote:

    P.S.

    silverminer = TMFSinchiruna

    :)

  • Report this Comment On June 03, 2010, at 10:13 PM, mhy729 wrote:

    silverminer/TMFSinchiruna,

    Wow, that was such an excellent reply/comment that I feel compelled to save it for reference. Can't thank you enough for all that you do here at The Motley Fool.

  • Report this Comment On June 07, 2010, at 8:24 PM, richthegeek wrote:

    dumberthanafool: Your response?

    Few things are more educational than witnessing a well-formed, intelligent debate between two who have the courage of their convictions. Sinch presented a great perspective - I'm interested in hearing your counter.

  • Report this Comment On June 12, 2010, at 9:28 AM, TheDumbMoney wrote:

    Been really, really busy at work and in general. I'll do my best, richthegeek.

  • Report this Comment On June 12, 2010, at 12:14 PM, TheDumbMoney wrote:

    1) Luminaries who hate gold: Buffett is the most famous, of course. Note, I don't hate gold, I just think you overrate it.

    2) Do we really disagree that much? -- I say in my previous reply that you have never convinced me that gold is anything more than a good 2-5 year speculative play. Implicit in that, I do NOT disagree with your actual calls on gold's price. $2000? I think gold may go to $4000 before it tops, just thinking in terms of historical fluctuations of the Dow-to-gold ratio, as people's appetite for paper currency waxes and wanes. Just because I think the gold market is frothy, and unsustainable, doesn't mean I think it cannot go on for a good while. I think people like Soros and Paulson have very good reasons for being "invested" in gold right now. I'll even cite a gold company for the dow/gold ratio: http://www.usgold.com/about-gold/ I just think (know, actually) that it's all speculation. Successful speculation, on your part, but just that.

    3) Froth: The buy gold store near me does not, as far as I know, buy/sell gold for pennies on the dollar, not sure what you are getting at there. I've never been in it, so maybe you know something about these stores that I do not. That store, and the commercials, and the Dubai ATM machine, etc., do signify a larger trend, at least of heightened awareness of gold. Again, I am not arguing these ARE de facto signs of froth, I'm just arguing they can reasonably taken to be, and I objected to and still object to any statement by you they CANNOT at least reasonably be taken as indications of froth.

    4) Speculation or Investment? -- You say, you don't view gold as an investment. You say, "[s]tocks are investments, and I always direct those looking to profit from the gold's bull market to focus upon the shares of miners." This is in fact one of my biggest problems with your approach. I understand your macro argument in favor of gold/silver appreciation, and even agree with some of it, as I'll more fully explain below, and hinted at above. But if so, tell people to buy gold and silver! Instead you do the above. Also, I remember an article in which you argued "yes you can" get dividends in the commodities sector, etc. (I think you pointed to a sad 1% or 2% dividend.) The problem is that this is all highly speculative, non-fundamental "investing." By-and-large, the mining companies are BAD COMPANIES!! Debt loads are often bad. Hedging strategies are often bad. They are crony and bonehead-filled backwater enterprises. Even SLW, which I know is a fave of yours, if not your absolute fave, has terrible returns on equity and investment. Truly terrible. ROI is 7. At the same time, it also trades at 33 times cash flow (!!), and nearly four times its book value. Do these seem like good numbers to you? They are not..., and SLW is one of the best miners. People may make a bundle by speculating on it, you may, but this is not investment, not in the Ben Graham sense, anyway. Let me be clear that this is what I think is dangerous: by focusing so much on companies, you convert what is essentially a purely speculative currency call (with gold being that currency, relative to fiat currencies) into an equity investment strategy. That is wrong. The original article is correct. If one wants to buy equities, and hedge against many of the things that buying gold/silver is potentially a hedge against, one is better off buying PM, or XOM, or others, fabulous companies, and in the meantime people who buy them get an actual dividend, and a relatively low beta. Tell people to buy increasing amounts of gold/GLD. Tell people to buy silver. Tell people to make that a larger portion of their investment portfolio. Just don't try to argue that people should look to gold/silver miners if they are looking for dividends! (Unless you truly think that people should not be invested in any company that is not a commodity company, in which case, I think you should say so.)

    5) Gold vs. Stocks, and a Brief History of Uncertainty and Fear: Is 30-years too short for you? If 1980 cherry-picked? Fine, let's go back longer. I'm not a Siegel groupie, but over 200 years, gold has strongly underperformed stocks, when accounting for inflation. http://en.wikipedia.org/wiki/Stocks_for_the_Long_Run. I could find a more scientific link if I have to. That's a bit out of date, as obviously gold has appreciated since 2001/2002, but 200 years is a long time (and keep in mind that 2002 was a low for the Dow, too). We are living in scary, uncertain times. But there have been a lot of scary, uncertain times in the last 200 years. We dealt with the Civil War. We dealt with the financial upheavals of the late 1800's. We dealt with the depression. We dealt with two world wars. We will deal with the the derivatives, too, silverminer!

    6) The Fundamentals: Unfortunately, I am out of time for now. I'll post again later. Briefly, I agree we're in terrible shape, I agree it's not clear our policy-makers know what they're doing, and in fact I suspect they do not. I disagree with the idea in one of your links that Bernanke wants to leave Great Depression Two to his successor. He is the best hope we have. See here: http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/200211... for his prescient foreshadowing of what he would do if we got into the fix we have gotten ourselves into. I think gold is rising because of a combination of: 1) fear of hyperinflation, and 2) general (cyclical) distrust of paper currency; I think it can continue. So there are those two things motivating gold purchasing. But I think it's just a cycle, and I don't know how long it will last. DEFLATION: If you fear deflation, just holding cash will make you money, as your purchasing power rises (given that most of our nation's assets are presently in cash now, this is likely what most people fear). If you do fear deflation, gold is not a good asset-allocation choice. (1980 is a good e.g. of that, where gold spiked during a period of inflation.) To the extent gold is/does rise while fears of deflation persist, it has to do with the other generalized worry about fiat currency and "the system," not to do with a rational response to a deflationary scenario. Gold is great if there is hyperinflation or something, or even significant inflation. But another way to deal with hyperinflation fears (or even fears of significant inflation) is to take out a fixed-rate mortgage, which will give your lender a nice bath when and if inflation really hits. Another way is to buy regular equities, particularly consumer goods stocks, which are like inflation ciphers to a certain extent -- inflation just passes through them, to their customers, they make money anyway. However, the last thing I fear right now is inflation. The M2/M3 money supply is still dropping. (See Bernanke's speech above, too, for an indication of how worried that man has been about deflation in the last two years.)

    The deleveraging you speak about re: derivatives will be deflationary, not inflationary, and gold may not ultimately be best in that scenario, unless there is wider dislocation and breaking down of the total world financial system, in which case none of us are going to care about the money we made speculating on gold (assuming shares of GLD, or of anything except tangible gold-in-hand would even be worth anything or redeemable or tradeable in such a scenario). As to the devaluation of the dollar, again it's all relative, to gold, sure, but also to oil, to the Euro itself, and also to the Yen. More later, if you ever read this, and if/when I have time.

  • Report this Comment On June 12, 2010, at 1:56 PM, TheDumbMoney wrote:

    And I would add, as I have said before, ultimately I think we just don't know, there is so much uncertainty, which is why I object to the certainty. If you are truly only arguing people should up their gold/silver/and/or/commodity/energy exposure to 10 or 15%, fine. It has seemed otherwise to me, but I have not read your whole oeuvre. If you honestly think people should be at 80% gold/silver, that I think exhibits a level of certainty about a certain asset class that I think can virtually never be justified and is insufficiently humble in the face of the complexity of all we face.

  • Report this Comment On June 12, 2010, at 4:18 PM, TheDumbMoney wrote:

    Also, I respect the thought you have put in, and I too will try to stay away from ad hominem attacks, as I hope I did in the above post.

  • Report this Comment On July 14, 2010, at 10:23 PM, silverminer wrote:

    dumberthanafool,

    If your own personal target price for gold is twice my own, then I conclude you have not a leg to stand on in the entire preceding discussion. Your barrage of reasons for objecting to my tone, or my confidence in my projections, or anything else on the subject is melted into a goo of incongruent feats of illogic by that very admission.

    You say you "know" that investing in gold can only be based upon speculation, to which I respond by inquiring as to the basis for investing in any stock on the planet. We purchase a stock after speculating that it will rise, and no matter how confident we may be in that expectation, there will always be someone with a contrary view to tell us that our confidence is misplaced and our investment purely speculative. Furthermore, if holding gold is speculative, then I submit that holding dollars in the midst of this mounting debt crisis is significantly more speculative.

    For myself, I can state with a clear conscience that I am 100% confident that gold will reach $2,000. I have allocated the bulk of my investment capital accordingly. It is the only thing in this entire economic landscape that I have concluded with any such semblance of certainty, and in my view it is one of the least speculative choices out there. Many non-pm equity alternatives require plentiful speculation into a recovery that I continue to view as highly unsustainable and ultimately mythical in nature.

    Unfortunately for you, in your #4 above, you exhibit a woeful absence of insight into the gold and silver mining sector. You wrote: "By-and-large, the mining companies are BAD COMPANIES!! Debt loads are often bad. Hedging strategies are often bad. They are crony and bonehead-filled backwater enterprises."

    These are demonstrably false statements that reveal just how little you have studied the sector. You may wish to note that I have made a living analyzing and covering the pm mining sector for several years now. Your ridiculously vague and unsupported assertion that they are "bad companies" detracts from your broader credibility. Debt loads run the gamut just as in any other sector, with plenty of debt-free operators to choose from. Almost every miner has eliminated all hedging for pms, and this has already yielded tremendous fruit as the metal prices have continued their run. Those that hedge by-product metals display about the same record of "you win some and you lose some" as the oil majors, the airlines, or any other of the myriad sectors that engage in regular hedging. As for "They are crony and bonehead-filled backwater enterprises"... I'm going to give you the benefit of the doubt and assume you were being facetious.

    Then you go on to attack SLW, which is an ironic choice since my 2008 call for people to consider SLW on strong valuation has been followed by a 700% run. You may also wish to take proper note of the fact that I have studied this company inside and out with a degree of diligence and scrutiny unlike that which I have devoted to any other stock. I also possess sufficient expertise on the sector to know the proper analytical context for ROE, P/E, or other common valuation metrics as they relate to mining equities. Here again, were you to approach me with humility and inquire as to the correct procedures for valuing mining equities, I would have been happy to share my knowledge with you. I would be delighted to point out that a supposed book value of $1.78 billion for SLW is about as accurate or useful a metric as my dog's scholarly attempts to estimate the number of squirrels in our neighborhood. If you carry on insisting that SLW is overvalued, I will be happy to school you on the topic.

    You say one is better off buying PG or XOM that buying mining stocks. I agree those are solid companies, and I intend to transition out of pms ans into blue chips just like those when the time approaches. And let me be clear, there is no reason that investors can't have both, which again is up to personal elections regarding allocation strategies. However, despite the casual confidence with which such alternative recommendations are commonly made, have you checked the comparative performance between those stocks you mention and the quality mining companies I've been recommending for years? Permit me to present this 5-year chart, which displays just how substantially the miners have outperformed the S&P 500, PG, and XOM shares over that 5-year period. Those returns are more than sufficient to make up for the relative (and likely temporary) lack of meaningful dividends (see below)!! On what basis do you expect that the next five years will be very different, causing total returns for XOM and PG to outperform gold and silver miners? Those that are unsure which group will do better could possibly stand to have both in their portfolios, wouldn't you say Mr. $4,000 gold? :)

    http://finance.yahoo.com/echarts?s=SLW+Interactive#chart4:sy...

    You keep harping on that one dividend article, so let's clear the air. I was not saying that gold and silver mining shares presently offer substantial dividends. I was merely offering a prediction that dividends will become commonplace as expanding profit margins yield major increases to cash flow as metal prices rise.

    I have never recommended specific allocations to precious metals, and in fact have routinely cautioned people against parroting my own admittedly intensive allocation. Certainty is something that can only be gauged and applied from within. I am sufficiently confident in my own price targets to maintain heavy exposure for myself, but I have always and consistently been clear that allocation is a matter strictly for each individual to consider independently based upon their own degree of confidence / certainty in the outlook for gold and silver and the depth of their due diligence in reaching those conclusions.

  • Report this Comment On July 15, 2010, at 7:11 AM, silverminer wrote:

    And I'm sorry, but did you use the name Ben Bernanke and the phrase "prescient foreshadowing" in the same sentence?

    Choose your heroes carefully.

    http://www.youtube.com/watch?v=HQ79Pt2GNJo

    For the record, I don't think I ever said he "wants" to leave GDII to his successor. I don't think anyone wants that kind of a legacy. But I think regardless of what he wants, his will be a most unfortunate historical legacy.

    Also, if you think deflation will be permitted to occur alongside a laissez-faire policy environment, you have another thing coming. Bernanke has revealed his formula for confronting economic contraction, and it involves injections of fresh money denominated in trillions. We have seen how quickly politicians abandon their rhetoric for fiscal austerity when climbing unemployment or waves of housing foreclosures threaten the basic economic security of their constituents. We have seen how quickly, also, they can be pressured into ignoring the will of their constituents entirely to employ hundreds of billions of USD to bailout banks and brokerages when those institutions start a fire they can't put out. In all prior cases, threats of deflation, deleveraging, or contraction have been met with massive sums of money in response to reflate, releverage, and expand. There is no evidence to suggest that subsequent rounds will trigger a completely opposite policy response, and so I rightfully conclude that all of these economic ills are ultimately inflationary because they will not stop short of destroying the value of our currency to combat these terrible ills.

  • Report this Comment On August 23, 2010, at 6:58 PM, TheDumbMoney wrote:

    Glad I checked back! I don't have a more substantive response now, and maybe not ever, as to be honest I've lost interest in the argument. A few things though:

    Oh tisk, tisk, I wouldn't say I have a price target for gold, nothing that specific, I just have a historical sense of where it could theoretically go, and I think - I know - that has no bearing on the rest of my analysis. Also, while there are good companies in the mining sector, many are quite badly run, relative to similar-sized companies in other industries -- I'm pretty comfortable I could defend that on the numbers. And even many of those that better run are simply not attactive, relative to the rest of the market, from a balance-sheet perspective.

    Also, I am well aware of how well your picks have performed in the last four to five years, though I appreciate the reminder. As you know, this is a tiny window of investing time, which has also coincided with a major macroeconomic event that favored what I suspect was a long-preexisting worldview. Anyway, be careful how much you play up your long history of involvment with and research into miners/precious metals, and be sure to question yourself: as one version of the saying goes, "to a hammer, everything looks like a nail."

    As to speculation distinctions, I view gold as a sort of a hybrid of a commodity and a currency, it shifts back and forth as seasons come. It is certainly in currency mode right now, rightly or wrongly. But either way, either of those asset classes are quite volatile, certainly moreso I think than the high-quality stocks I try to invest in, which you can read my commentary about on my CAPS page. The difference, since you care to ask, between analyzing gold, whether as a commodity or a currency, and analyzing Walmart, for example, is that with some assumptions one can come up with at least a reasonable estimation of WMT's likely cashflow going forward, and one can value that today. With gold, or silver, or yen, or grain, the analysis depends much more so, if not almost entirely, on a macroeconomic analysis. Such an analysis is less tethered to reliable data, is less tethered to assumptions that are statistically likely to be correct, and is thus much harder to get correct, in my view, at least with any consistency, particularly in the long term. (You say yourself that your gold and precious metals calls are based on a macroeconomic analysis.) Investing based on a macroeconomic analysis, versus investing based upon a considered evaluation of a particular company's future cash flow, competitive advantages, management, etc., is the difference between speculation and investing. (As complicated as selecting a stock is, evaluating the entire macroeconomic picture of the world and extrapolating THAT forward five, ten years, is much, much harder, and inherently more speculative.) Relatedly, since the fortunes of commodities/mining companies are utterly tied to such fluctuations, in my view they are inherently more speculative as well. (And yes, I know you hybridize this, as you analyize particular mining stocks more conventionally, though their larger, out-sized exposure to the macroeconomics still applies.) That is why they are labelled cyclical by the entire investing world, whereas KO is not, even though KO is obviously impacted by recessions and booms as well, as are we all. Is there an element of speculation in all investing? -- sure; anyone who tells you otherwise is trying to get you to park your cash in his money market fund and pay him fees, even though cash is a speculative investment, too. (Buying a wrench is a speculative investment ferchrissakes.) But distinctions can and should be drawn.

    I am well aware, too, that Ben Bernanke is not god. Note though that your statement that he will leave GDII to his successor, and your statement that he will not allow deflation to occur, are likely contradictory, though I allow for the (remote) possibility of a hyper-inflationary depression. I think he is a good man for the job right now because I do believe he knows what tools to employ, and has the chutzpah to employ them if necessary. Relatedly, be a little more wary of conflating the Fed with Congress: the Fed is statutorily independent, as Volcker showed when he hiked interest rates in the early 1980s. Obviously, the Fed has to be sensitive to public opinion, but in my view you too-casually link the two institutions, which is a total misreading of the Fed, if so.

    Finally, your comments about monetary pumping are almost Plosserian in their refusal to acknowledge the impact of the velocity of money, and money mulitpliers, on the actual supply of money, and consequently on the true prospects for inflation, at least in the near term.

    In short, as I mentioned before, precious metals, and miners, are a more speculative game than I am willing to play. I recognize I may lose out on some large gains, as I do agree the price of gold, for example, could very well spike much farther. But so be it. It will subsequently likely fall, and I'll likely miss the timing on selling. Rather, I'm quite satisfied with the 200%+ percent return, for example, on my twelve-year investment in MO/PM/KFT nee MO, over the last twelve years, which is itself exclusive of my gains on dividends and dividend reinvestment in the stock(s). I'm satisfied it will outperform over the next ten years as well. Much better risk/reward, in my view, not to mention less time-consuming and stressful.

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