What Percentage of Gold Should You Own?

What Percentage of Gold Should You Own?

The following article is a sponsored post.  My thoughts are included at the end.

When you look at the inflation-adjusted price of gold between 2000 and 2011, you’re going to see big gains – as in 418%. If you owned gold in 2000 and held it until its peak in the summer of 2011, you would have made a lot of money.  However, as we all know, timing can be everything when it comes to investing and even beyond that time in the market is an even better friend.  Which brings me to this question:  what percentage of gold should you own in your portfolio?

Thanks for time on Mark’s site today we’re going to share some perspectives.

Perspective #1 – Gold can be an inflation hedge

We feel gold can mitigate the risks you take in other parts of your portfolio, i.e. stocks, and it can maintain its value against inflation better than cash. For thousands of years, gold has been used as currency in civilizations across the globe. Its earliest known use as an exchange standard for trade is around 1500 BC in Ancient Egypt. Even before then, gold-work such as jewelry was highly valued as a treasure in pre-monetary societies. The Roman Empire began issuing gold coins (known as the aureus) around 50 BC, but it was preceded by gold currency in Greece and India. Since most of humanity would never hold a gold coin in their life, silver and sometimes copper were used in lower denominations. In 1900, the United States put its currency on the gold standard, which lasted until 1971. Only a few years later, high inflation caused investors to turn to gold as an investment commodity.

Gold prices more than doubled between 1978 and 1979 as U.S. inflation moved toward 13%, which is where gold got its reputation as an inflation hedge. After it hit a new peak of $594 per ounce in 1980 (inflation-adjusted to over $2,100 today), gold entered a long bear market throughout the 1980s and 1990s.  Since then, gold hasn’t experienced quite the same decline it did after 1980. Demand may be fueled by Russian and Chinese efforts to build their stockpiles, even while countries like Canada sell off their reserves.

Perspective #2 – Gold versus Cash

Despite some investment theories, cash is not part of your portfolio. There are no returns and there’s no protection against inflation.  If anything cash will be eaten alive over time thanks to inflation.  Conversely, over longer periods of investing, gold can beat out cash for investment returns.

Now, this is not to say you shouldn’t have any cash savings – such as an emergency fund – that just seems smart.  Maybe upwards of six months’ worth of expenses should be your target.  As you get closer to retirement, you can consider increasing your cash reserves to one to two years’ worth of expenses like Mark wrote about:  consider a cash wedge in retirement.

Perspective #3 – Gold versus Bonds

Investors typically head toward bonds when they want a passive investment strategy coupled with lower equity investing risk.  Today, more investors are getting that out of some form of fixed-income indexed funds. Unlike actively managed money, passive investment strategies are far cheaper – allowing investors to keep more of their money.  While it’s probably not a surprise to some, gold has had better returns than bonds.

Perspective #4 – Gold versus Stocks

Investing in stocks can build tremendous wealth but owning stocks can also come with great risk.

A general rule of thumb is, as you age, the percentage of your portfolio in stocks should decrease.

While every investor is different, gone are the days where you could rely on bonds to provide a large portion of your portfolio’s total returns.  Investors, collectively, are likely owning far more equities in their portfolios than they ever used to thanks to low-interest rates. As witnessed by some huge gains over the last year or so, stocks can deliver both growth and dividends to shareholders.  Gold tends to have an inverse relationship with rising stock markets.  With stocks on a tear, gold prices tend to stay rather flat or can fall.

So, what percentage is right for your portfolio?

Many investment experts believe a 5-10% gold weighting in your portfolio is par for the course.  You could even go as far to say that as part of a fail-safe investing strategy; investors could consider owning up to 25% gold in their portfolio.  That link will take you to an overview of the permanent portfolio – a conservative investing approach that has served some investors well.

That 25% weighting may seem unreasonable to some, so getting back to a more reasonable 5-10%, you can keep a tidy hedge against an unexpected financial crisis.  (Recall that gold’s last bull run was spared by the 2008-2009 financial crisis, which had many investors running for places to invest far away from stocks.  Some expert investors consider gold as an investment insurance policy.)

At the end of the day we can’t tell you the optimal percentage of gold to hold in your portfolio but we do have confidence it can be part of your investment plan.  We believe a well-balanced portfolio can include gold, silver and more.  You can consider these tips for investing in precious metals.

When in doubt about your financial plan, seek professional help of a fee-only advisor.  He/she can help you learn about your investing objectives, your risk tolerance and what financial products (including different asset classes) can help you realize those objectives.

My Own Advisor – I believe all forms of investing have risks and I echo the link above to my article. When in doubt about your financial plan seek professional financial help.  Even if you don’t obtain professional guidance, question your assumptions often. That includes opinions and any advice from other investors.  Your best defence against a risky portfolio is a very diligent you. 

Do you own gold in your portfolio?  (Disclosure – I do not.)  Why or why not?