That’s the question most Americans ask when the topic of gold comes up in conversation. And it’s the wrong question.
What they should be asking is, “How much gold should I have in my portfolio?”
Let’s consider both questions today. If you’re a gold skeptic, please bear with me; and if you’re a “gold bug,” prepare to be disappointed, it’s likely I’m about to annoy both groups.
Gold is portfolio insurance, plain and simple. It’s a de facto policy against a catastrophic event. This insurance analogy really is the best way to think about gold. How much insurance you buy is up to you.
“There are good reasons for gold to be unloved at this stage and thus having a position in gold toward the lower end of the allocation range is justifiable. But only brave investors would omit it from their investment portfolios given the fluid world we live in.”
—Mohamed El-Erian, September 26, 2014
Would you go without life insurance? Health insurance? Homeowner’s insurance? Some people would, but they’re in the minority. The fact is, most people carry some insurance. It would be crazy not to, right?
You insure the things that are important to you or would be expensive to replace—your health, your car, your home. But most Americans do not insure their investment portfolios.
Of all the assets to insure, why not insure your wealth? And yet, I’ve seen estimates that fewer than 10% of Americans own gold as an investment. Why?
Because Americans suffer from amnesia when it comes to gold (and silver).
At one time, we were like the rest of the world. Americans who lived through the Great Depression needed no reminder about the value of precious metals—the lesson remained fresh in their minds. But subsequent generations have enjoyed a span of prosperity unrivaled in the modern world.
Executive Order 6102
The US government did its part to stamp gold out of our memories. In 1933, President Franklin D. Roosevelt enacted Executive Order 6102, which made the possession of monetary gold a criminal offense and required all US persons to deliver their gold holdings to a member bank of the US Federal Reserve.
I don’t bring this up to fearmonger, and I’m not suggesting President Obama is going to seize your gold. The rationale and results of Executive Order 6102 are a topic for another time. My point today is that it began the process of erasing gold from our collective consciousness. It only took a few generations and less than 100 years for gold to go from an essential asset class to an investment for those on the fringe.
If you are lucky enough to have known your grandparents, chances are you will remember them owning precious metal—probably coins. My grandfather had a fairly large stash of gold and silver coins, but he wasn’t a collector in the traditional sense.
My grandfather didn’t have a stamp collection, nor was he wealthy enough to have a car collection or a vast wine cellar. And while he did collect gold and silver coins, it was not a pastime he chose for fun or relaxation. It was not a hobby for him.
He saved and bought gold and silver whenever he could for the same reason logical citizens around the globe did so, and continue to do so today: because precious metal is the only time-tested store of wealth. When all else fails, precious metals retain their value.
Why Portfolio Insurance, and Why Now?
You buy insurance before you need it. And you buy it in reasonable amounts—based on risk and need. If you drive a 2004 Jeep Cherokee, you probably don’t need much in the way of insurance, but you likely have some. If you drive a new 2014 Jeep, you need more insurance, simply because you have more value to insure.
What is the typical cost of an insurance premium? Without digging into the intricacies of underwriting, let’s agree that an insurance premium is typically a percentage of the value of the item being insured, and that percentage will go up or down based on the estimated level of risk.
When you buy insurance, you’re insuring against accidents or incidents that may or may not happen. The fact that they could happen—along with the potentially dire consequences that could follow if they did—mean leaving yourself and your family unprotected is not a prudent option.
Today’s volatile and unpredictable global economic climate make the need for portfolio insurance in the form of precious metals a necessity.
So how much should you own? Sorry, but there’s no definitive answer to that often-asked question.
In the article referenced above by Mohamed El-Erian, former CEO of PIMCO, he writes (emphasis mine), “Investors shouldn’t forget that gold has its place and that a well-diversified portfolio should have gold holdings equal to 3 percent to 8 percent of total assets.”
Noted investor Mark Faber claims to have a personal allocation to gold of 25% and prefers Singapore as a storage jurisdiction.
Other, more pro-gold investors have suggested much higher amounts. The recommendations will vary based on the pundit’s worldview.
If you believe the US stock markets and the US dollar will continue to be strong, that our enemies stand no change of causing the US further harm, and that the world will remain relatively peaceful, then you can make the case for a low level of portfolio insurance.
On the other hand, if you’re fearful that the US government is overleveraged, the dollar is at risk of serious weakening, the fundamentals that underpin the stock market are weak, and global geopolitical risk is high, then you may want to evaluate how you’re protecting your assets.
How much gold should you own? Only you can decide—but at least you’re asking the right question. If, to adequately protect your assets, you need to add more gold to your Hard Assets Alliance account, the price of gold—near a four-year low—is only making your insurance cheaper.