Should You Go For The Gold?

February 27, 2014

With the 2014 Winter Olympics in Sochi now over, the United States ended up winning 9 gold medals, 6 silver and 11 bronze medals. It’s truly amazing to watch the athletes ski, slide, glide and flip their way to Olympic history. There was a previous post about how athletes are taxed on the prize money awarded with their medals and as I watched the games, I thought about how gold and other precious metals can help an investor reach their financial goals.

Two extremes

There are two extremes on the precious metals spectrum. There are some who believe that investing in gold is a money losing proposition because it doesn’t pay dividends and it costs money to store. In fact, Warren Buffet said, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

On the other end are those who believe that the US dollar is quickly losing purchasing power and gold is the true currency. There’s a growing concern that rampant inflation and debt will make the dollar worthless. While I know people who believe that inflation will soon jump to double digits and we’ll burn dollars for fuel, I question their reason for gathering gold or silver. If we suffer such devastating economic collapse, I don’t believe the main currency will be gold or silver but gasoline, food, clean water, and antibiotics.

The place for gold in our portfolios

The place for gold in our financial portfolios is somewhere in the middle of the spectrum. Gold is part of a larger asset class called commodities. Its price tends to be uncorrelated to the stock market, so having some gold can lower the overall risk of a portfolio. A recent study by economists reported that from 1836 to 2011, gold earned an average annual inflation-adjusted return of 1.1 percent. By contrast, they estimated long-term returns to be 1.0 percent for Treasury bills, 2.9 percent for long-term bonds and 7.4 percent for stocks.

So how much gold should you have in your portfolio? It depends on your risk tolerance and overall goals but many economists suggest that gold or silver comprise no more than 2% of your overall investment portfolio. Of course, the recent Olympic medalists aren’t thinking about what the economists are saying. Their medals ARE the dividends of all their hard work and dedication. Congratulations to all the athletes!

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