I had a friend of mine the other day ask me, “Is buying gold a good idea?” He then quickly proceeded to ask, “Should I add gold to my portfolio?” You might be wondering the same thing. I believe gold and other commodities should be part of any well diversified portfolio. If you have been reading any investment news lately, gold recently has hit an all time high, though recently slightly pulled back. I believe it’s wise to own gold, and should be part of your long term investing. I own gold coins, but also have gold based mutual funds and ETFs in our retirement accounts. I’m not a “gold bug”. Unlike Glenn Beck, I’m not believer that the world is going to hell in a hand basket, and you need the three Gs (guns, gold and god). It’s more related to macro economic trends – these trends started early 2000′s, continue today, and appear it will to continue for the distant future. With global monetary polices, it’s not a matter if we’ll have debasing of our currencies, it’s a matter of when and how much.
Why Own Gold?
Adding gold to your portfolio should not be thought as traditional investment compared to stocks. After all, when was the last time a piece of gold bullion gave you a dividend? Gold should be thought as an insurance policy. Do not look at purchasing gold as a method to get rich. It’s a method to help hedge against inflation, deflation, or uncertainty with government policies. With fiat currencies which are printing more money than ever, the repercussions could be dangerous. Right now we do not have the velocity with money, so therefore inflation is currently at bay. The Federal Reserve assumes they can remove the cash quick enough when our economy picks up. It can be said the Federal Reserve kept previous rates after 9/11 too low for too long, and where a primary member in causing the sub-prime crisis. The Federal Reserve also missed the crisis itself. What makes people think the Fed will be able to properly land this airplane?
Gold’s essential quality it’s not someone else’s liability or asset. That separates gold from the majority of capital assets rely on someone else’s ability to pay, like bonds and bank savings, or the performance of the management, or some other delimiting factor, as is the case with stocks.
The primary reasons to own gold:
- As a hedge against inflation or deflation. It has been shown gold not only responds during inflationary times but holds up against a deflation.
- As a hedge against a declining dollar. Gold is bought and sold in U.S. dollars, so any decline in the value of the dollar causes the price of gold to rise. The U.S. dollar is the world’s reserve currency.
- As a safe haven in times of geopolitical and financial market instability. It is often called the “crisis commodity”, because people flee to its relative safety when world tensions rise. Gold is not subject to decreasing value as more and more fiat money is printed.
- Based on the commodity of gold’s supply and demand fundamentals. Gold is used not only used as bling-bling, but has commercial purposes. There are a limited amount of gold mines, and it’s costly to open new ones.
- As a store of value. As mentioned initially, you don’t get rich owning gold. I keeps in line with the value of other market prices. Unlike stocks and bonds, it can never be worth zero.
- To diversify your portfolio for proper asset allocation. Gold has had a negative correlation to stocks and bonds. There has been multi-year trends that gold out-performed stocks, will this trend continue?
Asset Allocation
How much gold should allocate to my investments? The typical allocation of commodities should be no more than 3 – 10% of your total portfolio. I recommend some physical holding of gold, and should be no more the 1-3% range. Plus, they are also nice to look at 
. With owning gold coins or gold bullion, you have to concerned where to store it safely and insuring it. You have a number of options: safety deposit box, hidden in the ground, in your own safe, or with a holding service. Gold is a small market comparative to other markets like the NYSE so pricing can vary quite a bit daily. For past few months we’ve seen wild swings of of up or down $25+ USD per day. I recommend with any commodity to dollar cost average, and buy on the dips.
Where to Buy Gold Coins?
You can buy online, or your nearest numismatic store. For online, I’ve had results when buying gold through APMEX, their prices are good and their service has been great. For a local store in Long Island, New York, I’ve had good results with Eastern Numismatics Inc. They are based on Long Island, but they also have a web site to purchase online. When purchasing coins they are typically 3-6% over the spot price of the raw material. This is because of the cost to create of the coin, transport and middleman fees.
Taxes
What happens when I sell bullion? Unfortunately the US government considers coins as a collectible, and is taxed at your income rate, not long term capital gains (like stocks). For this reason I plan on holding my coins for many years and maybe even pass down to my heirs.
Is there a gold bubble?
Maybe. It’s a little concerning when you can buy gold plated Sony PS3 game consoles, and every other commercial on financial news sites mention owning gold. For me, I’m a long term (10 – 20 year) investor, and based upon the macro economic policies gold will go higher. For the short term (next 6 – 24 months) it’s possible it will go lower. Silver is an alternative to gold, and might be a better option for the short term as the ratio to gold/silver is at historic highs. This means one of two things could happen, either gold is way over priced, or silver is under priced. I believe silver is under priced at the moment, with long term trend going much higher. Silver is used more than gold for commercial purposes. In the end, I believe it’s wise to own both commodities.
Disclosure: I own gold coins and gold (ETF and mining mutual funds) in our retirement accounts.
I’m with you on the short term bubble. Gold may be worth $1000 to $2000 (or more) per ounce in the future thanks to the funny money we printed, but with little to no inflation in 2009 and the government’s ability to manipulate the markets, I’m curious how much inflation the market is anticipating a decade from now.
Perhaps another way of asking this is: what price should gold be sitting at today based on the inflation estimates?
I’ve yet to see a good answer on this question, so I’ll be sitting on the sidelines until I do.
“I’m curious how much inflation the market is anticipating a decade from now.”
The bond markets are one indicator. With a 30 year bond going for 4.5% they state low or little inflation. The bond market has been wrong in the past, and I’m not sure I’ll risk my entire portfolio on this classic stat. Most debt purchased lately has been under 10 years and could have massive repercussions in the future.
“What price should gold be sitting at today based on the inflation estimates?”
Great question! Gold itself is also a hard item to price for various factors:
- Market size of gold sellers and buyers
- The manipulation by central banks
- The increase of emerging market countries purchasing gold (ie China)
No different than purchasing stocks, it’s a fools game to time it. I would rather buy in little amounts over a long period of time for these reasons, than stuck on what price to purchase it at.