Monday, May 08, 2006

Hedging the soon-to-be-broken-buck

Super investor Warren Buffett chose the wrong way to hedge what he sees as broken buck in waiting.

As he noted over the weekend, he still believes that the dollar is overvalued due to the US's current account deficit. Unfortunately for Buffett, and his investors, the way Buffett chose to hedge a drop in the dollar cost $955 million.

Buffett has the wisdom to admit his mistake. And since he still believes that the dollar is over-valued, he is still looking for ways to hedge a decline in its value -- including his $4B investment in 80% of Iscar, an Israeli manufacturer.

Another way for Buffett might be to buy gold which today hit a 25-year high. I have a somewhat painful personal experience with the shiny metal. Several years ago I was persuaded to buy into gold for the same reasons that Buffett is concerned about a potentially weak dollar. I decided to buy shares of a gold stock mutual fund. Within a few days it was up 15% over where I purchased it. Then it started ratcheting down -- 2% a day. Before I knew it, my investment was 2% underwater.

I took my loss and learned a lesson. Since I could not understand the reasons driving the fund to go up and down so much each day, I felt that I was sailing in stormy seas without a compass. Now I have mixed feelings about the investment. If I had held onto it, it probably would have increased in value given the longer term trend. But I was uncomfortable with volatility which I could not understand. Selling the fund's shares eliminated that discomfort. But it may have cost me money in the long run.

I wonder whether Buffett would come to a similar conclusion regarding the purchase of gold as a hedge against a decline in the dollar.


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