Today I breezed through Swain\’s copy of Dave Ramsey\’s financial management book The Total Money Makeover Workbook and it had a short section on not investing in Gold (and it is Maven IG\’s position as well). I believe that gold and similar commodities are an important part of an investment portfolio.There are really arguments on both sides, and my side is definitely a conservative but insightful one.
Gold is one of those limited natural resources that all of the women and men see as a status symbol in their lives. In the old days it was a major currency, and backed the U.S. dollar into the 1970s. But today, almost every major currency is a fiat (and I don\’t mean the car) imaginary value for currency. Because gold is a limited natural resource (unlike cotton) it theoretically only decreases in value when miners discover more gold.
Why not? Dave has some very good points when it comes to gold
- Gold rarely outperforms inflation (its recent average is around 2.2% annual)
- Gold people are out to get you (like the Cash for Gold people and pawn shops) and will get you to buy Gold high in times of economic crisis. (or in the case of cash for gold, give you modest value per the actual value.)
Why? Paul from the GTSF Investments Committee has been fear mongering a lot recently about how the U.S. banking and currency systems are doomed – we were both fans of Congressman/Dr. Ron Paul for Republican Party Presidential Nominee last Spring… partly based on the Gold standard ideas of Dr. Paul.
- Wouldn\’t it be great if your penny was worth something?
- What if this private entity the fed could not randomly debase the currency?
- How can the U.S. be 7 trillion dollars in debt and still be printing money?
What I see as proper portfolio management is that gold and commodities need their own sector in your portfolio. You want to hedge against inflation, currency risk, and global meltdown – but you obviously don\’t want to use your hedge to make great expected returns. A reasonably amount of your portfolio to have in real assets like Gold is about 10%, which means that when 80% of your portfolio is down, if you needed to access something that has been growing, you could use Gold. Eventually your portfolio should have 10% of high risk (like startups too) so you would have 10% completely safe, and 10% completely at risk.
And like most major portfolio purchases, you should never buy because of the hype (so don\’t buy because I wrote this article) but because it is what\’s best to manage your desired risk/reward.
ETFs make it simple to invest in gold without worrying about storing it where it won\’t degrade. Check out $GLD and $IAU which I have invested in before and made a reasonable amount of money from 2005-2008, and I just held it knowing that on a bad day, it would go up. They store bullion in warehouses and purchase 1/10th of an ounce per share that you buy. It\’s easy, simple, and easy to track.
So don\’t go shore up all of your capital in cash to gold or vice versa. Gold will protect your cash and equities, but it really is not designed for growth… Assuming a stable and intelligent government, value protection should be a part of the currency and so Gold should stay relatively stable. Treat gold as one of your sectors to manage.
Finally though, if you are going to cash out from the stock market and keep cash under your mattress, look into Gold, it\’s better to have something that can\’t be printed than something that can. Check out this video on YouTube from Ducktails on inflation httpv://www.youtube.com/watch?v=t_LWQQrpSc4