Should gold be viewed as a tactical or strategic asset?

World Gold Council/7-12-2017/Gold investor risk management and capital preservation

“There is nothing to prevent an investor from using gold as a tactical or short-term investment purely driven by price performance. However, research has consistently shown that the true value of gold is linked to a modest, strategic allocation that serves as a core part of a portfolio – a foundation. This has not been demonstrated by the World Gold Council alone (see www.gold.org/investment/ research). Examples abound of other well respected organisations that have arrived at the same conclusion. These include New Frontier Advisors, Oxford Economics, J.P. Morgan, Mercer, and The University of Virginia Darden School of Business, among others.

Indeed, gold’s benefits should not be solely linked to its price. The key lies in gold’s ability to diversify and, thus, lower volatility; reduce losses in periods of financial turmoil, in part due to its role as a high-quality, liquid asset; and preserve purchasing power. Even under the assumption that gold’s average annual return is a modest 2%-4% over the long run – lower than its historical return and akin to the global rate of inflation (see Table 2 in the previous section) – gold’s benefits mean that holding 2%-10% in gold can greatly benefit investors seeking a well balanced, diversified portfolio. Interestingly, this range also applies to international investors’ portfolios.”

MK note:  The point made in the sentence italicized above is something we have always advised at USAGOLD.  Gold’s primary role is the preservation of assets in uncertain times, in particular uncertain times fueled by governments’ rampant issuance of unbacked paper money and official sector debt – times like the present.

It wasn’t that long ago that we were receiving inquiries from clients who had established a 10% to 30% portfolio position (our recommended acquisition levels) in the early 2000s between $270 and $600 per ounce. They wanted to know what I would recommend now that gold constituted 50% of their portfolios, and in some notable cases as much as 70% of their portfolios.  Gold was trading then near the $2000 per ounce level.  At the time, when we did not know if things were going to be worse or better, most opted to simply leave things as they were.  The common refrain, in keeping with the point made by the World Gold Council above, was “I didn’t buy it to speculate.  I bought it to protect what I have.”

As to the percentage of the portfolio gold and silver should occupy, 2% is way too low in my opinion.  Something between 10% and 30% makes the most sense for the average investor looking to truly diversify the well-documented risks in investment markets today.  How high you go within that range depends upon how you personally feel about the current state of the economy, financial markets, geopolitical risks, etc.  The price of gold should also play a role in that assessment.  Naturally, lower prices encourage increasing the weight within the portfolio . . . . . . . .

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