Which Is the Best Refuge: Gold, Gold Miners or Currency?

A reader asked for my take on the difference between owning currencies, gold and the gold miners. The reader notes that they seem to be similar in some aspects but different in others.

I'm not sure there is a single all-encompassing answer to this, just opinion.

From the top down they provide similar protection to a diversified portfolio during periods slow decline or deterioration in the U.S.

I made a comment in this week's video that if you think Michael Panzer will end up being correct, you probably should buy a lot of gold and foreign currency as the dollar would likely decline a lot from here against both. To be clear, I do not draw the same conclusion that he does.

However I am not so sure that in the face of a terror attack the dollar would decline. The dollar used to be a flight to safety destination as it was in 2001 and during other quick and scary events. The money that would come into dollars would then go in to U.S. treasuries. Gold also has a history of going up in the face of real fear like that.

Over the last couple of years I have been less interested in the gold mining stocks compared to just using GLD (which I own for most clients). I made a switch from Anglo Gold (AU) into GLD a couple of years ago and am unlikely to go back to a miner anytime soon. Here I am differentiating between a gold miner versus a broad diversified miner of which I have two in my ownership universe, or a narrow miner of something other than gold, of which I have one or two on my radar but do not own.

Over the last year the metal has outperformed the Market Vectors Mining ETF (GDX) and Newmont Mining (NEM) but most of that has come in the last three months. It seems to me that at times the metal leads, but that the miners also lead some of the time too. One theory you've probably seen is that the ease of trading GLD means the miners will now always lag the metal. I wouldn't bank on that one, but if there is ever a terror event again or something else that causes that sort of fear, it seems more obvious to me that GLD would be better than the miners.

Foreign currency exposure is not really (or should this be not yet) protection against panic, save for the Swiss franc perhaps. I view currency exposure as a way to diversify cash and protect against deterioration not terror.

I have felt for a while that the dollar is on a slow path to having to share the role of world reserve currency, and that it will eventually cede that role to something else. (Here is a link to a post on this subject I wrote three years ago). I don't know how long this will take or which currency will supplant the greenback, but nothing in the last couple of years has changed my thinking.

If that pans out, then some moderate exposure to foreign currency (or very short term debt) should make sense.

Comments

[Ventureshadow:]

Gold has risen far far faster than the stock price of most gold mining majors. With the terrible US balance of trade, the mounting national debt, several very expensive wars continuing, and terrorism continuing the price of gold in US dollars will not fall in the near future (except temporarily and by small amounts). This means that the stock price of US and Canadian profit-making gold miners should rise. Newmont and Iamgold have lagged particularly much, hardly rising as gold has tripled. Yamana and CDE have lagged compared to Kinross and Barrick. At this time these lagging stocks have a greater upside potential and less downside potential than gold metal and its proxies.

2008 Mar 04 07:30 PM

[Ichiban:]

The link to the post three years ago has expired. I'd appreciate it if you could post it again. Love to read it.

2008 Mar 11 01:17 AM

[Roger Nusbaum:]

i just tried it and it works

2008 Mar 11 09:02 AM