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May 13, 2011, 12:02 a.m. EDT

5 money moves one gold bug is making now

Inflation-proof stocks, bets against dollar, Treasurys, drive de Vaulx’s view

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By Jonathan Burton, MarketWatch

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3. Be down on the dollar

Given his view that the U.S. dollar is in a long-term secular decline, de Vaulx has sunk about 8% of the funds’ assets into currencies that he believes will be stronger than the dollar.

About half of that allocation is given to the Singapore dollar, in the form of shorter-term Singapore government bonds. While the bond yields are low, currency appreciation — non-U.S. currency typically gains value when the dollar loses clout, and vice versa — has provided handsome returns, de Vaulx said.

The funds are also exposed to Hong Kong dollars, Canadian dollars and Norwegian krone, de Vaulx said.

4. Bet against Treasurys

Muted or benign inflation would favor holders of longer-term bonds, including U.S. government debt. Taking the other side of the trade, de Vaulx has added a small short position in Treasury futures to the funds.

“Inflation will be the likely outcome, especially in the U.S.,” he said. “Long-term rates have nowhere to go but higher.”

Two or three years from now, 10-year Treasurys could yield above 5%, de Vaulx said. Treasurys yielded 3.2% on Thursday. “We don’t own any long-dated bonds,” de Vaulx added.

5. Beware of the BRIC markets

Brazil, Russia, India and China — the so-called BRIC markets — have all been emerging-market darlings, though less so lately given concerns about global economic growth and higher inflation.

For de Vaulx, the issue is relatively moot — his funds have no direct exposure to any of these four investor favorites. Developing countries in general will face difficulty grappling with higher commodity prices, the fund manager noted.

“Inflation is going to become a problem in many emerging countries,” de Vaulx said. In particular, “food inflation will hurt them more than in the Western world.”

Moreover, de Vaulx said he considers China, Brazil and India to be expensive markets. And if there’s one thing a value buyer hates most, it’s an investment that is priced too high to deliver a margin of safety — a cushion — if the best-laid plans go awry.

“Investing requires a judgement call not only on the outlook, but the valuation,” de Vaulx said. “We ask more questions about what can go wrong as opposed to fantasizing about the upside. We fail to buy stocks because we imagine risks that never materialize.”

“Try to focus on what can go wrong,” de Vaulx added. “If you avoid the losers, ultimately good things will happen to you over time as an investor.”

Jonathan Burton is MarketWatch's money and investing editor, based in San Francisco.

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