Dave Asks:

What do you think of buying gold, via index fund or other means, given inflation concerns? I’ve lately been considering $ exposure and am thinking of going more international to hedge the $ (via index fund) and buying gold to hedge inflation. What are good ways to buy gold? What are your thoughts?

This is a bit of a doozy of question. And before I answer it I want to make it clear I’m not a financial advisor or any kind of investment guru. What follows is purely the opinion of a thirtysomething who probably shares with Warren Buffet only one thing, a preference for drinking Coke.

I think Dave is right to be worried about a continued slide of the U.S. dollar. A few weeks ago I made a few suggestion of things to do to hedge against the sliding dollar. This week The Economist, one of my favorite magazines, is showing calm concern as the “crashing” dollar made its cover.  While I don’t harbor Wall Street’s enthusiasm for interest rate cuts, I certainly don’t think the Fed will raise interest rates. Given interest rate policies, there is far too much going on that tips the scales towards continued detoration of the dollar. That said, I do think we’re not so far off the bottom. I don’t see the dollar losing more than 25% against the Euro in the next two years.  Though it lost much more than that in the past five. In 2002, the Euro could only buy $0.86. Today it’s worth $1.48, almost double.

International funds and gold are all good hedges against a continued dollar slide. As investments, these “hedges” have already been appreciated by a good amount in the past couple years. Gold is near all time highs. Though, adjusted for inflation it’s still nowhere near the highs it hit in the early 80s. While I have my doubt that both gold and foreign stocks can continue to perform as well as they have, as hedges against the dollar they are good bets. In the case of gold, it’s also critical to know when to get out. The people who bought gold in the 80s certainly kicked themselves when gold tumbled in the late 80s and 90s as inflation was beaten down. For that reason, I personally prefer international investing to commodity investing. Holding international stocks is a good investment period, not just a good investment if you’re worried about inflation or a declining dollar.

I believe conventional wisdom suggest that individuals should have about a 20% exposure to foreign stocks. I’m personally around 25% and have been steadily increasing that exposure.  I believe 30%-40% is probably more appropriate for those younger than 50.

The more interesting question is what foreign markets? Emerging markets especially the BRIC (Brazil Russia India China) have had an incredible run in the last few years.  I’m skeptical if these markets (especially China and Brazil) can continue rocketing up without some type of correction. If I were buying right now, I’d look at some of the following regions (I’ve listed the corresponding Barclay’s iShare ETFs that tracks of each of those markets).

Emerging Market:

  • Mexico (EWW)
  • Taiwan (EWT)
  • South Africa (EZA)
  • Latin America (ILF)

Mature Markets

  • Europe (IEV)
  • Japan (EWJ)
  • UK (EWU)
  • Canada (EWC)

Of course a good bet is always the Vanguard’s ex-US all World ETF, VEU. Not to forget gold, Barclay’s offers IAU, a gold index ETF. There also plenty other ETFs that track foreign markets, but I’m familiar with Barclay’s iShare family and Vanguard.