>The Golden Rule
January 6, 2012 Leave a comment
No, I am not one of those wild guys you see on TV or hear on the radio who promise that Gold is about to break out to $10,000 an ounce. The only investments many of these guys sell are gold and silver. I am not even willing to predict that gold will enter record territory in 2012.
In fact, it may well drop. The current market conditions for gold are far from ideal. Gold imports are down in India, and there is speculation that European countries may be forced to sell gold to help finance their debts (which would drive prices down). Furthermore, the current price of gold may be being artifically propped up by a surge of worried Iranian citizens buying gold as a safe haven, and Chinese purchases in advance of the pending Lunar new year.
But my model portfolio is 4% gold, and it makes a lot of sense to have gold in one’s portfolio.
First, gold was a very good investment last year, yielding a greater than 10% return over 2011. And, on top of that, it is almost completely uncorrelated to the S&P 500 index. Over the last 250 trading days, the correlation coefficient between the S&P 500 and gold was effectively zero (-.02). This is a risk hedger’s dream, a rising asset that is completely uncorrelated to stocks. Adding gold to your portfolio decreases its overall volatility.
Second, more and more investors (large and small) are realizing that neither the Euro nor the Dollar are secure monetary instruments. More investors will move to gold (what else is there?) as this trend continues. Indeed, we are also seeing gold’s correlation to the Euro-Dollar exchange rate moving to zero (indicating no correlation).
Gold holds a winning streak of 11 straight years, and it may not make it to 12 in 2012. However, that should not deter one from buying the bright metal. It is a hedge against inflation, reduces portfolio risk, and will go up as demand for Dollars for Euros drys up. I hold both the SPDR Gold Trust (GLD) and the iShared Gold Trust (IAU).
When to sell: Never, as long as the correlation with stocks stays low … or until someone starts mining gold on the moon.
