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“Central banks and some very smart people hold at least a small portion of their wealth in gold as a hedge. Should you?”
By Lorimer Wilson, editor of munKNEE.com – A Site For Sore Eyes & Inquisitive Minds
[This synopsis of edited excerpts* (570 words) from the original article (1491 words) by Logan Kane provides you with a 62% FASTER – and EASIER – read. Kane is receiving compensation from Seeking Alpha for pageviews of his original unedited article as posted there so please refer to it for more detail. Please note: This complete paragraph, and a link back to the original article, must be included in any article re-posting to avoid copyright infringement.]
“Gold is historically the world’s best store of liquid wealth and a defense against potential devaluation of fiat currencies but is gold still a viable investment? The answer depends on how you’re trying to invest and what your goals are. For many investors, gold is a good choice. A 5% – 7% allocation to gold has been shown to reduce volatility in difficult times and provide a countercyclical benefit to your portfolio.
The logic behind investing in gold
Since the creation of the Federal Reserve in 1913, the purchasing power of the U.S. dollar has steadily declined.
Source: Meb Faber Research
- …Bonds were pretty much a wash until yields started falling in the 1980s, which boosted bond prices.
- The U.S. dollar is down 98 percent against gold since FDR took the U.S. off the gold standard.
- Of course, if you’d invested in stocks, you’d have come out okay, but it would have been a bumpy ride.
…Owning stocks and bonds exposes you to the same systemic risk, [however,] which is the devaluation of the U.S. dollar, especially in the form of an inflationary shock.
The good news is that you don’t need a lot of gold to protect your portfolio…
- Since 1968 (when good market data begins again for gold – the US government banned gold investing for a few decades in the middle), the metal has held its value nicely, delivering a 7.1% annual return.
- In fact, since GLD was founded in 2004, it’s actually beaten equities on a price appreciation basis (equities edged out gold when you include dividends).
What efficient frontier models say about gold?
Over the last 20 years, gold has won an allocation of as high as 35 in the historically optimal portfolio across asset classes. In hindsight, very few people did this.
Source: Portfolio Visualizer
Over the last 10 years…gold still wins nice allocations across the board, with up to a 14% allocation in the model. Gold’s correlation with equities hovers around zero, and its correlation with bonds is around 0.3. This is likely due to the fact that both bonds and gold do well in times of economic stress.
Source: Portfolio Visualizer
I find the figures that the model gives to be rather high. Once you include factor driven equities and bonds, the ideal gold allocation drops to my recommended range of roughly 5 % – 7%…
My model) …works great for protecting your principal against equity bear markets and inflation:
- If you live off of your investments, periods of high inflation will hurt both stocks and bonds, potentially putting you in a tight spot. Gold gives you something that you can cash in if equities and bonds go down at the same time to sustain your lifestyle without having to sell equities or bonds at unfavorable prices.
Conclusion
I’m an optimistic person, but I feel that there is a strong historical and data-driven case for investors to put a little money in gold. How much you should invest in gold depends on how much wealth you have to protect. If you have a good job but little assets, I wouldn’t worry too much about it. However, if you have some serious wealth to protect, gold helps keep you safe from inflationary pressures…
Gold can be overhyped by its most die-hard proponents, but the case for owning a little in a diversified portfolio is hard to ignore.”
(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)
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(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)
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