The Golden Portfolio
Posted by James Randolph on July 16, 2012
July 16, 2012 – In recent months, there has been more mixed feelings about gold as a part of the investor’s portfolio due to developments in the market that have given investors an appetite for risk-on investments instead of the precious metal. Gold can be viewed as an alternative currency, a much-needed refuge from both political and financial instability in the world, and a reliable indicator of the rampant inflation in our economy.
The question for most investors is not whether gold should be a part of your portfolio, but rather what part it should constitute of your overall portfolio given the current market. Bonds have retained their status through the 2008 crisis and tend to retain their yield in low-inflation periods. As a hedge against inflation, which is very helpful in the current market environment, it may make more sense to hold dividend-paying stocks and securities protected against inflation. Due to the sheer amount of money that has already been printed as a part of the quantitative easing programs, it is important that investors begin protecting themselves now from bond-price declines that must eventually work through the market as a consequence of an increase in the money supply.
The rule of thumb in many speculative and investor’s minds is that gold should occupy 10 percent of your portfolio. Research recently emerging from the Leuthold Group and authored by Eric Weigel confirms a positive link between gold prices and the expectation of inflation. The money printing fiscal policy of central banks may be much needed in markets, but it surely devalues paper currencies, which is ultimately a perfect market environment for the appreciation of price in gold.
Gold may not be a replacement for the dollar, euro, yen, or yuan, but it is the best hedge against inflation accessible to investors. The meteoric rise in gold in the past eleven years, but especially in the past four years can be partially attributed to the money-printing policies instituted to cope with the financial crisis.
Incidentally, from the period of 2006 to 2007, Weigel found that gold “behaved more like a risky asset,” moving in a secure correlation with stocks. Prior to the 2008 crisis, gold was considered an extremely risky asset, one of the most volatile wild cards on the market. That view has surely changed, and this suggests that gold behaves differently in different market environments.