As the Dollar Dims, Gold's Luster Grows

This raises an interesting scenario: Much of the concern about a falling dollar has centered on potential repatriation by foreigners. Perhaps overlooked are American investors shedding their dollar-denominated assets, which, directly or indirectly, is helping boost gold.

Rather than "looking to get rich on a global crisis" or believing all paper assets will turn to "toilet paper," Coxe recommends investors have 6% to 7% of equity portfolios in gold-mining stocks as an insurance policy. In his personal accounts, the strategist owns "big liquid names" such as Barrick Gold (ABX Quote), Placer Dome (PDG Quote) and Glamis Gold (GLG Quote).

Such holdings represent "prudent diversification and protection against some blowup," he said, noting the U.S. current account deficit is currently more than 5% of GDP. There's "no precedent" of a major industrialized nation having such a high current account deficit "without a massive currency devaluation," he said, suggesting another 25% decline in the dollar is a "reasonable probability." Such an outcome implies gold trading in the $450-to-$500 ounce range, Coxe suggested.

The Golden K.I.S.S.

Perhaps all this discussion of the dollar vs. gold amounts to overanalysis of a simpler story many people fail to grasp, or don't want to acknowledge.

"Reasons [for gold's strength] vary from day to day -- in December-January it was the war trade, now it's the dollar -- but the biggest thing going on is a reallocation from paper to tangible assets," said John Hathaway, manager of the (TGLDX Quote)Tocqueville Gold fund. "It doesn't take a lot of money going into gold and out of paper to have a huge price impact because the asset classes are so different in size."

Hathaway agreed "gold needs to correct" in the near term, likely in conjunction with a rebound in the dollar. Such a move could prove beneficial to Harmony Gold (HMY Quote) and Gold Fields (GFI Quote), two South African producers who've lagged other gold shares recently because of strength in the South African rand vs. the dollar. (His fund is currently long both.)