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The Best Hedge Against Uncertainty - Gold or Foreign Currency?

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Warren Buffet

Do you think of Warren Buffet as smart? Naturally. At least when it comes to investing (his ideas on inheritance are loony, but that's another topic). Not long ago he exchanged a significant amount of his money for currencies other than the US dollar. By the way in case you are wondering what I mean by "significant", try about $20,000,000,000.00 for size.

Why? He is losing faith in the US dollar. So for a hedge, he turns to foreign currency. Interesting.

After all if you listen to conservative talk radio, you hear lots of ads for hedging your wealth with gold. You don't hear about hedging with Swiss Francs.

The claim is thrown around that gold is the oldest form of money. Gold always holds its value. Etc., etc. In a way that makes sense, but we need to dig a little deeper. Like what is money anyway?

What Is Money?

Is money that greenish piece of paper (referring to US currency)? Is it the gold and silver coins of a bygone era? What exactly is money?

Think about it for a bit. Money facilitates trade. It makes exchanging goods and services easier. But why is it that anyone would accept money? What value does a check or a pile of cash have in and of itself? What good is a lump of gold?

The honest answer is none of the items listed above have any real value of their own. They can't be worn, they won't love you back, you can't eat it, and it won't shelter you. The only reason money (or gold) is valuable is because people think it is.

Which means that in its true essence, money is merely an idea. Gold isn't valuable because it is. It's valuable because people think it is.

Does that help us decide whether gold or foreign money is a good hedge? I think so.

And The Winner Is…

As I've shown, there is nothing sacred about gold or it's value. Its value is just as valid as the value of the British pound. And the British pound is a better hedge than gold coins.

Yes, foreign currency is the better hedge. You see, you want a hedge that is going to hold its value and be able to be easily exchanged. Where in the world are gold nuggets used for money? Um, nowhere.

How many gold nuggets will buy a loaf of bread? Uh?

On the other hand what fraction of a pound will buy the same loaf. Not hard to figure out. You see, the whole idea of a hedge is something that can easily be used if things get ugly. You also need something that will hold its value and be easily exchanged.

Gold may well hold its value, but it will fail miserably on the easily exchanged part. Furthermore, foreign currency is easily stored (in a bank in its native country, or in a brokerage account locally). Try storing a brick of gold inconspicuously under your mattress. Good luck!