Investors seeking a balanced portfolio often include gold because its
price tends to move in the opposite direction to risk assets such as equities
and high-yield bonds.
One of the most common questions such investors ask is “how much gold
should I own in my portfolio?”
It’s one that’s getting renewed attention, not just because gold recently
pushed above USD 1,400 per ounce, but also due to the plunge in global bond
yields and the likelihood that the US Federal Reserve will soon begin easing
monetary policy.
Many astute investors typically allocate 5-10% of a diversified portfolio
to gold. Bullion should always form part of a portfolio, with a holding of at
least 10%, according to Dr Mark Mobius, a high profile investor interviewed
recently by Bloomberg.
However, there are some strategies, including the 'Permanent Portfolio' investment strategy, which typically
recommends a 25% allocation to the yellow metal, alongside similar weights in
equities, bonds and cash.
There are many reasons investors allocate to gold, including the fact that
it:
• Has delivered strong long-term returns in
its own right.
• Typically helps diversify a portfolio, owing
to its low to negative correlation with financial assets.
• Is a highly liquid asset with zero credit
risk.
• Has a strong record of protecting wealth in
periods of market stress and high inflation.
It is also worth noting the supply of gold is finite and it can’t be
created at will. Central banks can print money, but they cannot print gold.
This is another attractive feature driving demand for gold and its price,
given ongoing investor concern about rising debt levels and monetary
debasement.
All these factors reinforce the case for gold within a long-term
portfolio. Whether that number is 5%, 10% or 25% is up to the individual.
Whatever allocation they choose, gold is an asset that should be on
investors’ radars.
