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?
When i first started learning about money. I was scooping up gold and silver left right and center and accumalated a bunch. Like the writer stated its a good insurance. Silver gold bull (I think the post author) is a good company to buy from, ive bought from them a couple times. I prefer dividend stocks these days. I like receiving something quarterly or monthly. Collector coins ie perth mint year of the ? And kookaburras are a really good way to buy bullion as you get the collector value on top of the bullion value. Some coins have tripled in value for me already.
I also prefer dividend stocks these days. Owned about 30+ and a few U.S. ETFs for the last 5-10 years. So far, so good.
Although I might just “throw” $500 on ACB or some weed stocks to see what happens long-term.
ACB is the most active traded stock on the TSX! 🙂
Tempted to buy some!!
I used to have Goldcorp and Sandstorm and sold them a few months before the gold prices crashed. I did not touch any gold since. I prefer to stay away from it. I did triple my investment with Sandstorm gold.
I haven’t invested directly in gold yet but will consider it in the future. Thanks for sharing.
I’d say in the neighborhood of 3-10% of a Portfolio could be held in Physical Gold or Gold Equities. Kevin O’Leary holds 5% of his portfolio in Gold and rebalances every year. So he says he is always buying weakness and selling strength. Gold has been an asset of exchange for a very very long time and was made by Supernovas so that is pretty cool. Gold is also valued by the tremendous effort in mining it and storing it, so that contributes to the price. I’ve also heard some currencies may infuse gold into the plastic or paper bill, so you’d have the real asset in your hands as backing. Also, the permanent portfolio allocations have a good track record of financial stability and growth.
LOL. Thanks for the laugh!
I might write about the permanent portfolio at some point. Just shocked at how good those returns are despite 25% gold and other allocations. Happy New Year Kevin.
Ah good old buying opportunity of 08,I have investments that only went down about 30% during that time, actually loaded up on more during the sale of a lifetime(actually hoping for at least one more). The investments I held were never sold and they have more than doubled since that time, btw it only took a year for my investments to recover their loses, not to mention all the deals when people commit financial seppuku by buying high and selling low gave me too.
In December 2011 we won an early bird draw in a local hospital charity and had the choice of $21,000 cash or the equivalent amount in gold bars. We took the cash: paid bills, invested some, and took a vacation. 2 years later – divorce. By then that cash had already been spent one way or another but if we’d have been dealing with the gold bars and there’s no doubt my ex would have spirited them away before I knew about it.
I have no interest in investing in stocks that are gold mines. No real interest in holding gold either though I’ve thought about buying a gold coin or two and put it in my safety deposit box. Speaking of which I do have small amounts of gold in there, in the form of jewelry that belonged to my deceased mother. In the 70s my father bought my mother and I matching necklaces he’d picked up in the Yukon. It has a little glass flask that holds an ounce of gold.
What I’d like to know is where I can buy gold coins. And not get ripped off cause I’m no expert on precious metals. Maybe I already have all the gold I need.
This is who I purchase from. You will find them fair and honest. Their pricing over spot is better then most other dealers.
Do not buy gold! It’s useless!
It’s not useless…if you know its role and how to take advantage of that position (e.g. think ‘fear’).
Buying or holding GOLD today is useless (we are in a bull market). For those holding 5% of gold – WHY?
I told others two weeks ago – that buying pot stocks is safer than bitcoin and better than GOLD – OIL etc. Canopy up over 30% in a week :). (aph – acb – weed – emh – mari – FIRE
I personally don’t own gold directly, I prefer stocks, but you never know what the future holds! Thoughts on the weed stocks of late? I might buy some.
Jan 1, 2018 California goes legal. Bigger market than Canada. This will be an international story over the next 2-3 years as more countries go legal. Canada will be a big player in this space. https://www.usatoday.com/story/news/2017/12/28/legal-marijuana-arriving-california-after-decades-underground-dealing/975323001/
Geez, I didn’t know that about California.
Depending upon the time frame you might be right! But, you could say that with other assets and asset classes.
Thanks for sharing your story Cheryl. Likely some lessons learned there with cash winnings for others!
“I have no interest in investing in stocks that are gold mines.” I hear you.
Unfortunately I cannot recommend personally where to buy gold; having not done so but to your point – maybe you do have all the gold you need!
No gold for me. As others mentioned, I have not taken the time to learn it and understand it.
I have actually chosen to not really invest in basic material stocks either for that matter so I am staying completely away from gold. I would be curious to see what the correlation between gold, stocks or economies (stabilities of) are. Seems like a lot of work.
If you had bought AAPL during the same timeframe, you would have made a killing too.
Same Dividend Earner. Geez, AAPL has been on a tear in recent years!!
re: Yes, the gold has increased in value, but no where near the gain…received with BMO
That’s one way to look at. But you are comparing apples to oranges.
BMO is a corporation which conducts business, in a multitude of ways, every second of every day in the pursuit of profit.
Gold, quite literally, does nothing.
BMO return* is ~8%.
Gold return is ~3%.
All that costly business BMO engages in is really only worth ~5%/yr.
I’m not cheerleading gold nor stocks, but we have to look at these thing all-inclusive if we are going to compare.
*I calculated dividends paid but not dividends reinvested.
p.s. — BMO vs gold: you’re basically comparing the returns of a producer with a product.
I personally have enjoyed the gains of my bank, pipeline and utility stocks over the years vs. gold. I really don’t understand the major affinity to gold but I haven’t read up on it’s perceived value to a great extent. Just like bitcoin 🙂
What Percentage of Gold Should You Own?
SST: “Dividends provide you with income but only because they are removed from the value of the paying company (i.e. capital gain). That hunk of rock that does absolutely nothing has generated an 8%/yr return for you, or ~$35,000 worth of gold “income”.
My wife invested in BMO about the same time and for roughly the same amount.
The gold cost $31,500 and is worth $45,045 today 43% increase
The BMO cost $34,500 for 657 shares and initial shares are now worth $65,792
She reinvested the dividends totaling $22,367 and received 338 shares now worth $34,185
Total current value of BMO is $100,000 and provides $3,600 annual dividends at 6.29% on her total investment
Yes, the gold has increased in value, but no where near the gain my wife has received with BMO, and BMO is no where near the best stock in our holdings.
Bought 35oz gold in 2006 and though it’s gone up in value (and down) it generates ZERO income for us. Sits in the safety deposit box doing nothing. If we sold it we’d have a large CG and have to pay more in taxes, so we’ll let it sit doing nothing.
Would I buy it again even if we had another crisis, NO! But each to their own.
re: If we sold it we’d have a large CG and have to pay more in taxes
I’m not a tax expert nor should you take any tax advice from me, but I would shift your perspective on selling and taxation. More than one way to skin a cat. Plus, hope you are deducting the cost of your SD box on your tax return. 🙂
re: Bought 35oz gold in 2006 and though it’s gone up in value (and down) it generates ZERO income for us.
Dividends provide you with income but only because they are removed from the value of the paying company (i.e. capital gain). That hunk of rock that does absolutely nothing has generated an 8%/yr return for you, or ~$35,000 worth of gold “income”.
That’s the thing I keep thinking about cannew. I really enjoy seeing my portfolio generate income. I could generate income by selling assets but that’s not smart at this stage in my asset accumulation years. In another few days, ready to fund the TFSAs!!
I find the Permanent Portfolio – and it’s phenomenal historical record – very interesting. Another great article!
re: Permanent Portfolio
There’s a LOT to dissect with the PP (perhaps a future topic for Mark?).
Regarding the role of gold, it is held as a hedge against inflation. However, it’s been shown time and time again that this is not the case. If anything, gold is a hedge against crisis, but not inflation. The primary driver of gold (and precious metals) is fear; psychology not economics.
Yes, I will consider writing a post about the permanent portfolio. Lots to talk about there 🙂
Thanks Ben. Good to hear from you and best wishes for 2018.
What about holding gold via PM streamers like Sandstorm, Franco-Nevada etc?
I have considered that but that industry/sector seems so cyclical. I would rather invest in a collection of companies that is needed largely regardless of the market weather. Thoughts?
Who exactly is the “we” brought up numerous times in this article?
I don’t own gold, never have and never will. Nothing against it, just never got involved or interested in it.
No mention of the author, either.
re: …never got involved or interested in it.
Initially, I was both involved and interested in it. Then I began to learn about it. Now I’m much more involved and interested in making money from those who are involved and interested in it vs just holding it. 😉
“We” is the link at the end for the company that wanted to write on my site. I have no long-term affiliation or partnership with them.
I have not yet invested in gold directly and have no intentions of doing so.
All critiques of the article aside, I own a very small amount of both gold and silver (with the % getting smaller as the other portions of my portfolio grow).
re: 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.
This is my approach to precious metals. What the author is implying is that if you BOUGHT in 2000 and SOLD in 2011, you would have made a lot of money. That’s what I do — buy and sell. Much better to perpetually make money, regardless of timeframe (e.g. dividends). Precious metals have served me well once I understood their place in the market and how to take advantage of that position.