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How Much Gold Should You Have In Your Portfolio?

Posted by Brock Bowers on

Does Gold Belong in your portfolio?

There is absolutely no denying that gold has held value for thousands of years.

It is found in the graves of the elite all over the world throughout antiquity.

The search for it drove much of the exploration of the New World. Treasure hunters risk their lives pursuing chests of it lost at the bottom of the sea.

An old Wall Street adage says, “Put 10% of your portfolio in gold and hope it doesn’t work.”

We might add to that, "pray you never need to invest in gold."

Benjamin Franklin once famously said that “an ounce of prevention is worth a pound of cure.” We believe Mr. Franklins words ring as true today as it was when he first said it. 

A study revealed by the esteemed Ibbotson Associates says gold may be a good idea.

Ibbotson Associates was founded by Yale professor Roger Ibbotson in 1977 and specializes in asset allocation.

Professor Roger Ibbotson pioneered collecting the requisite data used in asset allocation and in quantifying the benefits of diversification for a portfolio.

Covering a 33-year period they determined that of the seven types of assets covered in the study, precious metals are the only one with a inverse correlation to other assets.

What this means is that precious metals perform best during years that traditional assets classes, such as stocks and bonds had negative return.

Ibbotson Associates determined that investors can potentially improve their portfolio risk-reward performance by including precious metals with allocations of between 7.1 and 15.7 percent.

The report says, "gold and silver are often viewed as a safe harbor during times of crisis. Conversely, during an economic expansion demand for silver and platinum is thought to increase."

It continues, "results suggest that including precious metals in an asset allocation may increase expected returns and reduce portfolio risk"

Finally, the Ibbotson study previously mentioned also looked at the relationship between gold and the US dollar.

It turns out that gold has a negative correlation (-0.45) to the greenback.

This means that gold moves in the opposite direction to the dollar and can provide some measure of protection against a falling dollar according to these quoted experts.

Many conservative investors believe their portfolios are diversified but they typically contain only three asset classes – stocks, bonds and cash.

With only three asset classes out of a total of seven, such portfolios are clearly not diversified according to experts like Ibbotson Associates.

Strategic asset allocation is the practice of realigning a portfolio's asset composition in order to accommodate drastic changes in market climates and risk.

Ibbotson noted that since 1969, stock and bond correlations have increased and, contrary to popular belief, a mix of these will not result in a diversified portfolio.

Today, most portfolios lack the inverse correlated asset classes like precious metals – necessary to achieve full diversification, and as a result are exposed to risk and volatility according to Ibbotson.

The overall performance of precious metals during the 33-year period studied was close to fixed income investments. Despite the long bear market of 1980 to 2002, precious metals outperformed both cash and inflation during the entire period.

In high inflation periods, precious metals were the top-performing asset class, and the study concluded that precious metals provide an effective hedge against inflation.

Precious metals were the only asset class with an inverse average correlation to the other asset classes, the basis for diversification.

Currency crises have been occurring ever since 1971 when US President Richard Nixon ‘closed the gold window’, and, globally, currencies were no longer backed by gold.

In addition to suspending the convertibility of the dollar into gold or other reserve assets, such that foreign governments could no longer exchange their dollars for gold, Nixon also instituted a 90-day freeze on prices and wages

– the first time in U.S. history that the government froze prices and wages outside of wartime.

Nixon took these steps to offset any inflation that resulted from these actions.

When confidence in a currency wanes, people flee to the safe haven of precious metals.

Perhaps most famously, the gold price exploded from 75 marks per ounce to 23 trillion marks per ounce in the 1920s Weimar Republic of Germany.

Discover all the 57 times hyperinflation has occurred here with this useful infographic.

Meanwhile, the rising price of gold is signaling a growing non-confidence vote in our government’s monetary policy.'

Stephan Bogner, analyst with Rockstone Research who earned his degree in economics at the International School of Management, says "I was pretty bullish on gold and silver in 2002 when I completed my university diploma thesis on the exotic topic "Gold in a Macroeconomic Context." I'm even more bullish today because the macroeconomics did not change; it got worse.

I do not recommend that anyone buy paper gold and silver in the form of certificates, options or futures. These are the most dangerous markets and the most manipulated. This includes exchange-traded funds (ETFs). You can't be certain that they are really buying physical gold and silver with all the money you put into ETFs or that you will get the physical bullion when you want to sell."

Professor Dr. Hans Bocker who is known worldwide as a financial and economic journalist emphasizes that it's crucial to physically hold bullion in order to survive the upcoming financial crisis.

Read more about Ibbotson Associates determination that investors can potentially improve their portfolio risk-reward performance by including precious metals with allocations of between 7.1 and 15.7 percent here.

One thing that is clear, unlike equities, bonds, and currencies, gold is not a liability of any government or corporation.

Governments and institutional buyers invest in gold directly, and they’ve been doing so for decades.

For centuries, conservative minded people have turned to gold during times of economic uncertainty.

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