Introduction
“How much gold should you own?” This article discusses a number of different views on the subject in an attempt to help you answer that question.
According to Portfolio Visualizer, gold’s correlation with equities hovers around zero and gold’s correlation with bonds is around 0.3 so owning gold works great for protecting your principal against equity bear markets and inflation. In addition, gold gives you something that you can cash in if equities and bonds go down at the same time enabling you to sustain your lifestyle without having to sell equities or bonds at unfavorable prices.
An analysis of gold’s performance since 1970 shows that gold offers potential preservation of purchasing power in varying inflationary environments:
- During periods when the annual rate of inflation in the U.S. has been below 2%, the price of gold has risen at an average annual rate of 6.7%.
- During periods of moderate inflation — defined as an annual increase between 2% and 5% — gold has risen at an average annual rate of 7.4%.
- During periods when inflation has been running above 5% a year. During such times, the gold price has increased by an average annual rate of 15.2%. Source
While gold is a smart investment, though, you should only invest a portion of your portfolio in this commodity, not because it isn’t safe to invest in gold, but because you have to build a diversified portfolio to weather the ups and downs of the stock market. Gold, like stocks, doesn’t trade perpetually higher. It fluctuates in value just like any investment so the question remains: “How much gold should you own?” Below are a number of different views on the subject:
Portfolio Allocation Suggestions
- Jeff Berwick:
- “While I would have no problem with having 100% in gold bullion in my portfolio I recommend holding:
- 30% in gold and silver bullion,
- 20% in gold mining juniors, and
- 15% in large-cap gold mining stocks
- for a total allotment in precious metals of 65%.
- Why? Because I expect all the monetary printing going on with abandon in the western world to foment a true bubble, not only in the price of gold but, even more so, in the price of the mining shares, especially the juniors where I expect a mania for the ages to unfold.” Source
- “While I would have no problem with having 100% in gold bullion in my portfolio I recommend holding:
- Robin Cornwell:
- Cornwell reminds us that, according to a study by Ibbotson Associates that, “Based on historical efficient frontiers, including precious metals moderately improved the efficient frontier and, based on forward-looking efficient frontiers, including precious metals lead to asset allocations with higher Sharpe ratios and that, as such, investors could potentially improve the reward-to-risk ratio by allocating
- 7.1% to precious metals in conservative portfolios,
- 12.5% to precious metals in moderate portfolios, and
- 15.7% to precious metals in aggressive portfolios.”
- In addition, he pointed out that “Ibbotson Associates found that precious metals, excluding cash, is the only asset class with a positive correlation coefficient with inflation and, therefore, the only asset class that can provide protection from a systemic crisis.” Source
- Cornwell reminds us that, according to a study by Ibbotson Associates that, “Based on historical efficient frontiers, including precious metals moderately improved the efficient frontier and, based on forward-looking efficient frontiers, including precious metals lead to asset allocations with higher Sharpe ratios and that, as such, investors could potentially improve the reward-to-risk ratio by allocating
- Nick Barisheff:
- stated that “the percentage mix is debatable but what is certain is that the historic three-asset-class allocation mix is outdated, out of touch with today’s economic and financial reality and a recipe for loss of wealth.
- To protect your portfolio and preserve your wealth,
- a 5% to 20% allocation to precious metals is an absolute necessity.”
- Jeff Clark:
- maintains that: “Your portfolio is at risk unless:
- 10% of your total investable assets (i.e., excluding equity in your primary residence) are held in various forms of gold and silver in your portfolio.”
- maintains that: “Your portfolio is at risk unless:
- David Ranson of Wainwright Economics:
- states that “according to our calculations, a portfolio is almost exactly immune to the damage that inflation (as expressed by the gold price) does to stocks when a portfolio has:
- 15% gold and 85% stocks.” Source
- states that “according to our calculations, a portfolio is almost exactly immune to the damage that inflation (as expressed by the gold price) does to stocks when a portfolio has:
- Erika Nolan:
- “Every investor should have:
- 10% or more of their portfolio in physical gold – coins or bars.” Source
- “Every investor should have:
- Jeffrey Christian and the CPM Group:
- found that the optimal gold allocation of gold to a portfolio was:
- 27% to 30% gold. Source
- found that the optimal gold allocation of gold to a portfolio was:
- Richard and Robert Michaud:
- determined that “Broadly speaking, the higher the risk in a portfolio, whether in terms of volatility, illiquidity or concentration, the larger the modeled gold allocation to offset that risk should be and that, as such, the portfolio allocation most likely to maximize returns for every unit of undertaken portfolio risk amid any combination of future financial and market conditions was
- between 2% and 9%.” Source
- determined that “Broadly speaking, the higher the risk in a portfolio, whether in terms of volatility, illiquidity or concentration, the larger the modeled gold allocation to offset that risk should be and that, as such, the portfolio allocation most likely to maximize returns for every unit of undertaken portfolio risk amid any combination of future financial and market conditions was
Some Conclusions
Gold can be over-hyped by its most die-hard proponents, but the case for owning a little in a diversified portfolio is hard to ignore.
- U.S. stocks are at record levels exactly at a time when global stress – trade tensions, populist nationalism, and the like – appears to be growing so this may be an opportune moment for you to shift at least a portion of their portfolios to gold: both the metal and depressed mining shares.
- In addition, as the world’s financial and monetary systems become increasing fragile, saving in gold is the ultimate safe haven for protecting you against a systemic collapse. In the inevitable transition that will follow such a collapse, holding gold as wealth is the ultimate strategy for survival. Saving in gold frees your mind allowing you to sleep well at night and not worry about inflation, financial markets and currency risks.
While gold has traditionally been seen as a tactical way to help preserve wealth during market corrections, times of geopolitical stress or persistent dollar weakness, we think there is a case to be made for gold as a core diversifying asset with a long-term strategic role in multi-asset portfolios.
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