Investing, economics, finance and random thoughts.
Why I own gold…
Why do people freak out so much when you tell them you own some gold in your portfolio? It’s as if you had just told them you killed a dozen people before lunch. The hyper-ventilation you hear from some when you even mention this topic is just nutty. It usually starts with some juvenile comment involving tinfoil hats. Then they pull out some quote from an economist (usually one that loves inflation to solve all problems) about how useless gold is. They may even hit you with the ol’ “gold is not a form of wealth but just a shiny metal” lecture (ignoring the bulk of human history, and all major central banks, that disagree with them). Then they tell you how “risky” gold is when their own portfolio may be loaded to the hilt with junk bonds, emerging market debt or other complicated investment products. They must think the Nigerian stocks they hold in their Frontier Market fund are a sure thing (assuming they even know what’s in the funds they own).
Well, I own gold and I admit it. I feel comfortable owning gold in my portfolio. I sleep well at night knowing I own gold even though it could drop in value. I understand that in a balanced portfolio gold is a useful tool. I trust gold to protect me in high inflation more than indexed linked bonds (TIPS) ever will.
Gold has no interest or dividends. I admit these things and acknowledge that this is one area that makes gold different than stocks and bonds. However, this does not make gold useless for diversification.
Gold maintains real purchasing power over time and it’s really good at doing this. No other asset on this planet has such a long history. I don’t worry about politicians printing trillions of dollars of gold. This is because politicians can’t print gold. Gold can also be owned directly without any obligations attached to it. These are unique attributes for an asset class when used properly in a portfolio (and properly does not mean 100% gold).
While gold does not have the interest or dividends of stocks and bonds, it has other benefits that can work at certain times to protect a portfolio that does hold stocks and bonds. Gold for instance does very well under high inflation when stocks and bonds do not.
Gold has risks just as stocks and bonds have risks. I understand what these risks are and how they fit in a diversified portfolio. Yet, I do not rely only on gold in a portfolio. I also own stocks and bonds to drive returns when gold is performing poorly. In diversification there is safety which is why I own all these assets and don’t get religious about it. I accept gold’s quirks because I know when it comes time for it to perform it will do so better than all its contemporaries.
The empirical evidence says that owning some gold in a portfolio is not the death sentence academic literature would suggest. In fact, at certain times having gold can be a tremendous help. So, either reality is wrong or the academic theories are. Given a choice between the two, I’ll take reality. That reality is that all portfolios should hold some gold for diversification against stocks and bonds despite what critics state. That’s why I own gold.
| Print article | This entry was posted by craigr on February 10, 2010 at 1:36 am, and is filed under Investing. Follow any responses to this post through RSS 2.0. Both comments and pings are currently closed. |
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Comments are closed.
about 5 months ago
I became a crazy gold owner like you yesterday. Just wanted to share that I’ve finally got the permanent portfolio allocation and couldn’t be happier. Thanks for all the info you put out there. I’m working my way through the harry browne archives as well which has been great for answering even more questions. I read his book 3 years ago and I finally got the allocation yesterday so it’s been a long trip but I’m glad I did the due diligence and am rewarded with confidence and peace of mind for my investments.
about 5 months ago
Ned,
Yeah I’ve been crazy for a few years now it seems. Between owning gold and owning LT bonds I’m a real heretic according to much investing advice I’ve read.
Yet, looking back over the past few years I’ve become remarkably calm about my investments. I pay virtually no attention to the markets now despite running this blog. In fact, I can’t even tell you where the market is price wise at this moment. I just don’t feel like I need to watch that stuff any more.
Hopefully you’ll start to feel the same way.
about 5 months ago
craigr: I have to admit I have ro get past some of the misconceptions of gold myself. Fail safe investing was a fantastic book and Harry Browne was spot on with muct that was written in that book.
about 5 months ago
Jim,
Been there myself. But when I looked at the data in context of an entire portfolio allocation I came around to Browne’s point of view.
about 5 months ago
I am looking forward to your “Why I Own Long Term Bonds” posting. I wonder what Harry Browne would say about Long Term Bonds today?
about 5 months ago
LT Bonds cetainly did their job in 2008 and actually pulled the PP into the plus territory for the year.
about 5 months ago
Yes I need to finish that one on Bonds. I don’t know what he’d say about them now, but I suspect the answer would be pretty much what he always said.
about 5 months ago
Well, coincidentally as I was listening to an old Harry Browne Money Talk episode today, I got my answer as to what he would say about bonds. It was from the January 9, 2005 episode, in the last segment, where he responded to an email question about bonds:
Scott: If you know that the government can’t make good on all its promises, then at what point would you decide it’s time to get out of bonds?
Harry: I don’t believe there is any point, Scott. Because we don’t know how it’s going to unfold. And one of the ways it might unfold is through heavy taxation and it’s a very likely possibility which in itself could go two ways. Number one is: it might increase the need for people to borrow money because so much is being taken away by the government which would cause interest rates to go up because of the demand for money and it would be bad for bonds. Or, people may decide that they are so squeezed by taxation that they can’t afford to buy a new car which they would normally buy by putting a certain amount of money down or trading in their old car and then borrowing the rest of the money. Or they might say they’re not going to buy a new house, they’re going to continue to rent because they are afraid that they will not be able to afford the mortgage payments and so on. And so the increase in taxation could cause borrowing to shrink; it could go either way. And if borrowing shrunk, then of course interest rates would go down and bonds would be the one thing that would be saving you under such circumstances. If interest rates went way up and we had inflation as a result of it then it would be gold that would save you. The point is: you don’t know what it is you’re going to need, and that’s why you keep them; keep all four of these things. In 1980, after 10 years of rising interest rates which were bad for bonds, I couldn’t convince anybody to put money into bonds. Oh, I shouldn’t say I couldn’t convince anybody, but a lot of people said I absolutely think you’re nuts to put bonds in the portfolio. They are guaranteed to go down in value. But over the next ten years, in the 1980′s, they went up in value. And they helped to keep the portfolio going well when cash and gold were not doing well and stocks were doing reasonably well but were uncertain, going up for a while, then down for a while and so forth. So you never know. That’s why you need a balanced portfolio. And with that you can look at the future brightly, just as brightly as this music that’s playing now. [Music plays: Bob Crosby, Come Back Sweet Papa]
about 5 months ago
Yeah that’s pretty much the answer I expect. In 2008 when I was holding LT Bonds all the experts said they were going to get slaughtered. By the end of the year, they were up over 30% in value. The future is just not predictable. Human behavior is just too random and there is no way to know ahead of time how the large group of people that make up the markets of the world are going to react to things.