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Ready for a remarkable statistic? According to data from IndexUniverse.com, Gold exchange-traded funds collected some $3.5 billion worth of new assets during the month of July, with SPDR GLD Shares (NYSE: GLD ) getting $2.8 billion of it. That made SPDR GLD the second-most popular ETF last month, behind only the wildly popular SPDR S&P 500 (NYSE: SPY ) .
This, however, makes sense. With the world uncertain about whether the United States would or would not raise its debt ceiling, many undoubtedly gave up on U.S. bonds and equities and instead sought out the protection that gold offers.
Having said that, one might expect that with a debt ceiling deal reached, money might start flowing back out of gold and into bonds and equities. In fact, just the opposite is happening. Gold ETFs collected another near $1 billion worth of assets on Aug. 2, the day after President Barack Obama signed the debt ceiling deal into law, while SPDR S&P 500 gave back more than $2 billion to investors. This action is not only an indictment of the process and result of the debt ceiling compromise, but also evidence of just how pessimistic the market is about the U.S. economy.
And I think it's right to be. Our federal government is a charade, municipal governments are beginning to declare bankruptcy, and reported unemployment is back above 9% and rising. Nothing there should engender any confidence in a looming recovery. What, then, should you do?
Although the recent debt-ceiling debate has shined a spotlight on many of our country's challenges, the fact is that none of these challenges are new. In fact, the market has been pessimistic about the U.S. economy and the dollar for some time. Over the past year, for example, the dollar has declined by 11% against the Brazilian real, 5% against the Chinese yuan, 5% against the Indian rupee, 10% against the Japanese yen, 10% the euro, and 27% against gold. Over the past six years, we're down 32% against the real, 20% against the yuan, flat against the rupee, 31% against the yen, 15% against the euro, and 73% against gold.
The hardest data point of all of those to take is the dollar's performance against the euro. I mean, really? Are the PIIGS really more appealing than us? And it's not like things are so hunky-dory in Brazil, China, India, or Japan.
Of course, investors know all of this, which, putting currencies aside, is why gold has been their best friend these past few years. In an uncertain world, it literally and figuratively shines.
I can't go on; I'll go on
At some point, though, we have to start asking how high it can go. Despite what some gold bulls say, gold is not about to become a functional currency. This isn't to say that gold or gold miners shouldn't be an allocation within a diversified portfolio, but rather that it, in and of itself, is not a long-term investment strategy. Human capital, ultimately, will be more productive than gold.
Yet I think one also needs to be wary of the U.S. and Europe. These regions are moving backward, not forward, and despite recent weakness, I do not believe this is a time to view either the dollar or U.S.-focused stocks as bargains -- let alone feel confident in U.S. Treasuries.
The global view
That's why I continue to think it's interesting that the world's emerging markets continue to be the purgatory to gold's paradise and the dollar's inferno. Investors like them relative to the U.S., but they clearly don't think they offer the same reliability. With greater growth and governance improvements, I believe this will change over time -- making now a great time for long-term investors to start building portfolios that are diversified over a basket of currencies. Because when money finally does flow back out gold, it will do so into options such as the real and rupee, yielding a rewarding tailwind for dollar-denominated investment portfolios that were already benefiting from the returns great companies can offer.
In practice, this means stockpiling companies with high returns on equity and global currency exposure. If you agree, Nike (NYSE: NKE ) , Wal-Mart (NYSE: WMT ) , and Philip Morris International (NYSE: PM ) are three great bets to get started -- and stocks that I'll wager will together outperform gold over the next five years from current prices. If not, I'll wear a pair of my wife's gold earrings to the office and post a picture on Fool.com for all to see.
Let me know what stocks you think will outperform gold over the next five years -- and what you'll do if they don't -- in the comments below.