Thursday, February 23, 2012

What Percentage of Your Portfolio Should be in Gold?

Jeff Berwick of The Dollar Vigilante has an article that was posted via LewRockwell.com.  He says he was at a conference where he said, "I have no problem with someone having 100% of their portfolio in gold."  He said that many in the crowd laughed at the comment, but he didn't find it so funny.

The whole article is short and worth a read.  He makes many good points.  He ends the article by backtracking a bit and saying that his organization actually recommends 30% in gold and silver.  They also recommend 20% in gold mining juniors and 15% in gold mining major stocks.  If you add all of that up, it is 65% in gold or gold related investments.  The 35% in gold stocks is highly volatile.

I completely disagree with the sentiment of having 100% of your portfolio in gold.  I don't even like the 65% allocation.  It is too high and too risky.  What would happen if the economy falls into another deep recession as it did in the fall of 2008?  Having 35% in gold stocks and another 30% in gold and silver would devastate your portfolio.  Of course, having 100% in gold would also hurt a lot if gold were to drop like it did in late 2008.

I am an advocate of the permanent portfolio as described by Harry Browne in his book Fail Safe Investing.  This would put you in gold for 25% of your portfolio.  Of course, I see nothing wrong with some speculation money that is for riskier plays.  For this money, I would certainly favor some more gold, some silver, some platinum and maybe some gold stock ETFs like GDX and GDXJ.  These speculation plays are just because of the economic environment we are currently in and the potential for a big reward.  However, anything beyond the 25% in the permanent portfolio has some substantial risk to it.

Here is the mistake that Berwick is making with his comment about being ok to have 100% in gold.  He, like many other libertarians, are mistaking gold for money.  Gold has a history of being money.  If we had a free market in money, it is likely that gold would be used as money.  However, that is not the reality we live in.  In America, the U.S. dollar is money right at this moment, whether we like it or not.

To prove this point, try this as a test.  Walk into a grocery store and load up your shopping cart with food.  Or you can even just pick out a few items.  Then go to the cash register and try to pay for it with a gold coin.  The cashier is going to look at you like you are nuts.  In fact, you could have 100 U.S. dollars worth of groceries and offer to pay for it with a one ounce American gold eagle.  The value on the coin says $50, even though the actual value is over $1,700 as of this writing.  My bet is that nine out of ten cashiers would not accept the coin.  Most would probably have to call a manager to come over.

The point is that gold does not serve as money in our society right now.  It has all of the qualities for a good form of money, but the government has essentially forced us to use the U.S. dollar.  That is why you don't want 100% of your portfolio in gold.  If the dollar price of gold goes down significantly, then you cannot buy as many groceries with it or just about any other consumer item.

In conclusion, my guess is that gold will continue to rise against the U.S. dollar.  However, I would not put all of your eggs in one basket.  If the price of gold in terms of dollars goes down, then you need some dollars to buy more.

2 comments:

Tommybee said...

I think that people who are 100% invested in the stock market are just as crazy as the people who are 100% invested in gold. No one knows how this mess is going to play out. Gotta cover your bases....Thanks for the great blog. I really enjoy it and I've learned a lot.

LIBERTARIAN INVESTMENTS said...

Thanks for your comment. And yes, people who are 100% invested in the stock market are crazy. I know some of them.