Bonfire of the Currencies

George Hosfield, CFA , is Ferguson Wellman's chief investment officer and chairs the firm's Investment Policy Committee.

In a move that we have referenced several times over the past six months May 7, 2010 Capital Market Update, "The Return of Volatility," we are now initiating a modest commitment to our Tactical Assets investment strategy. Though admittedly vague as a descriptor, we consider Tactical Assets to be a variety of instruments or asset classes that have a relatively low correlation to conventional stocks and bonds. In this case, our initial purchase will be of the gold through the exchange traded fund, "GLD." It's important to note that this is not motivated by any near-term inflation fears. Rather, it is an intended hedge against accelerating concerns of currency debasement and monetary disorder.

Given the budgetary and debt problems of southern Europe, the related swoon in the Euro, and the near $1 trillion stabilization package by the European Union to bail out Greece -- global monetary stress is clearly mounting. Unfortunately, history has shown that governments more frequently resort to currency devaluation than the difficult austerity measures, such as cutting spending and raising taxes, to resolve fiscal crises. While Europe is beginning to address its fiscal imbalances, its currency will likely slide further as economic growth slows or nudges back into recession.

Of further concern, Portugal, Ireland, Greece and Spain (often referred to in the media as "PIGS") are far from alone. The fiscal crisis in the developed world is enormous. Though the dollar has rallied relative to the Euro this year, it is not as if our fiscal house is in order. Clearly we, and much of the developed world, are on an unsustainable fiscal path. Fortunately, and unlike Greece, in the U.S. we still control our fiscal destiny. 


Historically, gold has proved to be an excellent hedge against the profligate use of the printing press, and monetary disorder in general. Though gold prices have risen handsomely this year, the move could be much more significant should concerns over the collective balance sheets of the developed world mount. Ironically, as this position in gold is intended to be a hedge, we hope this doesn't prove to be a terribly rewarding investment … only time will tell. 


The information provided herein is for educational purposes only and should not be construed as investment advice or as an offer or solicitation. Not all securities are suitable investments for all investors; therefore, Ferguson Wellman Capital Management will not necessarily implement any particular strategies discussed herein for all clients. We recommend that you discuss questions regarding your individual portfolio and investment strategies with your portfolio manager.