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I have some gold (GLD), but not much - a little over 1% of my net worth, and about 2% of my non-retirement investments. I'd like to increase this position as an inflation hedge and to have something that is less correlated with the market as a whole, but I'm not sure how much I should have.

My initial gut feel was to get up to somewhere between 5 and 10% of my net worth, but that's not really based on anything. Is there any general rule?

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I think most financial planners or advisors would allocate zero to a gold-only fund. That's probably the mainstream view. Metals investments have a lot of issues, more elaboration here: What would be the signs of a bubble in silver?

Also consider that metals (and commodities, despite a recent drop) are on a big run-up and lots of random people are saying they're the thing to get in on. Usually this is a sign that you might want to wait a bit or at least buy gradually.

The more mainstream way to go might be a commodities fund or all-asset fund. Some funds you could look at (just examples, not recommendations) might include several PIMCO funds including their commodity real return and all-asset; Hussman Strategic Total Return; diversified commodities index ETFs; stuff like that has a lot of the theoretical benefits of gold but isn't as dependent on gold specifically. Another idea for you might be international bonds (or stocks), if you feel US currency in particular is at risk. Oh, and REITs often come up as an inflation-resistant asset class.

I personally use diversified funds rather than gold specifically, fwiw, mostly for the same reason I'd buy a fund instead of individual stocks.

10%-ish is probably about right to put into this kind of stuff, depending on your overall portfolio and goals. Pure commodities should probably be less than funds with some bonds, stocks, or REITs, because in principle commodities only track inflation over time, they don't make money. The only way you make money on them is rebalancing out of them some when there's a run up and back in when they're down. So a portfolio with mostly commodities would suck long term.

Some people feel gold's virtue is tangibility rather than being a piece of paper, in an apocalypse-ish scenario, but if making that argument I think you need physical gold in your basement, not an ETF. Plus I'd argue for guns, ammo, and food over gold in that scenario. :-)

  • Can you please explain this : 'commodities only track inflation over time, they don't make money'? Why is this so? – Victor123 Jun 26 '11 at 23:33
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    Because the commodity's only value is to make goods or sell as a good, and inflation is the average increase in the price of goods. A bond's value is that it pays interest, which may be more or less than inflation. A stock's value is that it makes a profit (typically from selling goods) and so all else equal you would expect it to beat inflation by raising prices to match inflation and preserving the profit. money.stackexchange.com/questions/7938/… has a bit more detail. Also: commodities cost money annually to store and insure. – Havoc P Jun 29 '11 at 12:04
  • another way to answer is that historically, commodities have tracked inflation. note: they track inflation over a very long-run average. there are huge price swings in the meantime as supply and demand changes on certain commodities, and technology or fashion can make a commodity permanently more or less valuable sometimes. e.g. cars made oil a lot more valuable, that kind of thing. but all else equal, on average, gold today is gold tomorrow, except for inflation. Stocks have an up-bias (due to economic growth), but commodities supply/demand changes are more random, not "up on avg" like stocks – Havoc P Jun 29 '11 at 12:12
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    +1 for the apocalypse line. To paraphrase a friend of mine "You can't hedge against the end of the world". Not even with gold. – Fomite Sep 17 '11 at 18:20
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It depends on what your goals are, your age, how much debt you have, etc.

Assuming -- and we all know what happens when you assume -- that your financial life is otherwise in order, the 5% to 10% range you're talking about isn't overinvesting. You won't have a lot of company; most people don't own any.

One comment on this part:

I have some gold (GLD), but not much ...

Gold and GLD are not the same thing at all. Owning shares of the SPDR Gold Trust is not the same thing as owning gold coins or bars. You're achieving different ends by owning GLD shares as opposed to the physical yellow metal. GLD will follow the spot price of gold pretty closely, but it isn't the same thing as physical ownership.

7

My personal gold/metals target is 5.0% of my retirement portfolio. Right now I'm underweight because of the run up in gold/metals prices. (I haven't been selling, but as I add to retirement accounts, I haven't been buying gold so it is going below the 5% mark.)

I arrived at this number after reading a lot of different sample portfolio allocations, and some books. Some people recommend what I consider crazy allocations: 25-50% in gold. From what I could figure out in terms of modern portfolio theory, holding some metal reduces your overall risk because it generally has a low correlation to equity markets.

The problem with gold is that it is a lousy investment. It doesn't produce any income, and only has costs (storage, insurance, commissions to buy/sell, management of ETF if that's what you're using, etc). The only thing going for it is that it can be a hedge during tough times. In this case, when you rebalance, your gold will be high, you'll sell it, and buy the stocks that are down. (In theory -- assuming you stick to disciplined rebalancing.)

So for me, 5% seemed to be enough to shave off a little overall risk without wasting too much expense on a hedge. (I don't go over this, and like I said, now I'm underweighted.)

4

By mentioning GLD, I presume therefore you are referring to the SPRD Gold Exchange Traded Fund that is intended to mirror the price of gold without you having to personally hold bullion, or even gold certificates.

While how much is a distinctly personal choice, there are seemingly (at least) three camps of people in the investment world.

First would be traditional bond/fixed income and equity people. Gold would play no direct role in their portfolio, other than perhaps holding gold company shares in some other vehicle, but they would not hold much gold directly.

Secondly, at the mid-range would be someone like yourself, that believes that is in and of itself a worthy investment and makes it a non-trivial, but not-overriding part of their portfolio. Your 5-10% range seems to fit in well here.

Lastly, and to my taste, over-the-top, are the gold-gold-gold investors, that seem to believe it is the panacea for all market woes. I always suspect that investment gurus that are pushing this, however, have large positions that they are trying to run up so they can unload.

Given all this, I am not aware of any general rule about gold, but anything less than 10% would seem like at least a not over-concentration in the one area. Once any one holding gets much beyond that, you should really examine why you believe that it should represent such a large part of your holdings.

Good Luck

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10% is way high unless you really dedicate time to managing your investments. Commodities should be a part of the speculative/aggressive portion of your portfolio, and you should be prepared to lose most or all of that portion of your portfolio.

Metals aren't unique enough to justify a specific allocation -- they tend to perform well in a bad economic climate, and should be evaluated periodically.

The fallacy in the arguments of gold/silver advocates is that metals have some sort of intrinsic value that protects you. I'm 32, and remember when silver was $3/oz, so I don't know how valid that assertion is. (Also recall the 25% price drop when the CBOE changed silver's margin requirements.)

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Gold's valuation is so stratospheric right now that I wonder if negative numbers (as in, you should short it) are acceptable in the short run. In the long run I'd say the answer is zero. The problem with gold is that its only major fundamental value is for making jewelry and the vast majority is just being hoarded in ways that can only be justified by the Greater Fool Theory. In the long run gold shouldn't return more than inflation because a pile of gold creates no new wealth like the capital that stocks are a claim on and doesn't allow others to create new wealth like money lent via bonds. It's also not an important and increasingly scarce resource for wealth creation in the global economy like oil and other more useful commodities are.

I've halfway-thought about taking a short position in gold, though I haven't taken any position, short or long, in gold for the following reasons:

  1. Straight up short-selling of a gold ETF is too risky for me, given its potential for unlimited losses.

  2. Some other short strategy like an inverse ETF or put options is also risky, though less so, and ties up a lot of capital. While I strongly believe such an investment would be profitable, I think the things that will likely rise when the flight-to-safety is over and gold comes back to Earth (mainly stocks, especially in the more beaten-down sectors of the economy) will be equally profitable with less risk than taking one of these positions in gold.

  • Technically, gold also has pretty considerable industrial uses. Not enough to justify its currently bonkers price, but some. – Fomite Sep 17 '11 at 18:19
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The "conventional wisdom" is that you should have about 5% of your portfolio in gold. But that's an AVERAGE.

Meaning that you might want to have 10% at some times (like now) and 0% in the 1980s.

Right now, the price of gold has been rising, because of fears of "easing" Fed monetary policy (for the past decade), culminating in recent "quantitative easing."

In the 1980s, you should have had 0% in gold given the fall of gold in 1981 because of Paul Volcker's monetary tightening policies, and other reasons.

Why did gold prices drop in 1981?

And a word of caution: If you don't understand the impact of "quantitative easing" or "Paul Volcker" on gold prices, you probably shouldn't be buying it.

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protected by Chris W. Rea Oct 23 '18 at 12:40

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