One of the key reasons for buying gold - at least according to the World Gold Council - is to diversify your investment portfolio.
Almost every expert recommends having your wealth diversified.
But what does 'diversified' really mean, and how does holding some gold help?
In fact, how much should you actually have?
Very few experts say you should hold a lot of the precious metals (and those few that do may not qualify as an 'expert' - they are usually more like a salesperson). But holding some is often recommended.
Diversifying with gold
One reason for diversification is to preserve value when things get uncertain. When values of some asset classes fall or hit rocky times, other parts of your investment holdings should be going the other way; holding or rising in value.
Remember that diversification is different to 'asset allocation'. By asset allocation, you also ensure the right quality of assets in the portfolio.
Portfolios can be very vulnerable when you have a limited number of asset classes in them (eg: cash, bonds, equities only, or cash and property only) and they react to market conditions in a similar fashion. Periods of recession, or inflation (or even both) can do this.
Currently, returns on cash are very low, bond yields are declining to quite low levels, and some expect corporate earnings growth may become hard to find in the 'Japanese' future the world faces. And we have all recently lived through some significant swings in property.
There is no way to know what future forces will do, hence having a range of investment exposures - that is, diversification.
The proportion you have in cash, in bonds, in equities, in property, and in precious metals will change over time. (Owning a working business is also a valuable asset, as are some 'alternative assets' like artworks and antiques.) This change will be both due to your age (life cycle point), and due to your investment views about the future. Your need for income and your tolerance for and perception of risk makes any portfolio design intensely personal. It is a good idea to get help from a qualified adviser with this, but in the end it will be your choices and views that frame up the right spread for you.
One of gold's most valuable contributions to a portfolio lies in the fact that it is not correlated with most other assets - although for a Kiwi investor, it does recently seem to have a remarkable correlation to residential house prices. You still need to ask, will that last during your investment horizon?
While other diversifiers often fail during times of market instability, even a small allocation to gold can significantly improve the consistency of portfolio performance. Particularly appealing to many investors is the fact that this protection applies during both stable and unstable financial periods.
How much?
Of course there is no 'right answer' here; again, it is a very personal judgment.
We have seen recommendations of 0% ( including Warren Buffett and Charlie Munger), of 5%, of 7.1%, of 7.5%, of "10-15%", and all the way up to 25%. To a large extent it seems to depend of how growth-oriented the rest of your holdings are. The more aggressive, the larger your countercyclical precious metals holdings should be, say some experts.
And of course, your stage in life should play a role too - the older you are, the less likely you can weather and recover from a loss in value of your investments.
Having said that, perhaps the old standards don't apply in the same way that they used to. If you retire at 65 you should be expecting to live for up to another 30 years, and in anyone's assessment 30 years is a long-term financial perspective. You will need growth assets in your holdings. What you may also need to consider is having something like gold to buffer you through uncertain times.
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