A reader recently sent me a set of articles by Scott Burns about a person he calls the Rational Gold Investor here and here. I’ve been a long-time reader of Scott Burns because while he has been a steady proponent of passive and low-cost investing, he isn’t afraid to consider other investment alternatives.
Shayne McGuire manages gold investments for the Texas Teachers Retirement Fund, is the 18th largest pension fund in the world with over $120 billion in assets. He does not believe in gold as only a “armageddon” asset, but something that everyone should own a little of as part of a diversified portfolio.
Read the full article, but here are highlights from the interview:
- Gold has never been more under-owned as an asset.
- The supply of gold is difficult to increase.
- Financial leverage in the world economy has never been higher.
- Gold is an asset class that competes against equities and other asset classes, generally on a weaker footing becausen the long run (periods like 25 years) it cannot outperform stocks, bonds or real estate.
- Gold tends to like bad news. If houses go down, it tends to go up. It makes you feel like you’re betting against the home team.
- A lot of peculiar people seem to like gold and that makes people not want to be like them.
In other words, there are legitimate reasons to own some old, even if you don’t believe that the collapse of fiat money is imminent. At the same time, I think it is important to focus on the real numbers:
- The pension fund invests less than 0.5% percent of their assets in gold, and this number has never been higher than 1%.
- The value of all the gold in the world is about 0.6 percent of all financial assets. In 1980, the number was 2.5%.
In other words, the Texas Teachers Retirement Fund only keeps roughly a world market-cap weighting of gold, even if that amounts to roughly $70 million. Here that number is stated as 0.6%, while the previous source I quoted had it at 1.3%. Let’s split the difference and call gold’s world market-cap at roughly 1%.
If you had a $100,000 portfolio, 1% would work out to $1,000, which you could round off to a single 1 oz. gold American Eagle or Canadian Maple Leaf. They also make 1/2 oz, 1/4 oz, and 1/10 oz versions. I like the idea of holding physical gold here because you would have zero ongoing management fees (unlike an ETF), you maintain full control of the gold (away from any government), and you’d be more likely to hold it for the long-term (buy/sell spreads are big). Even if you had a million-dollar portfolio, a 1% allocation to gold would weigh less than a pound and fit inside your clothes or virtually any hiding place.
Buy a little bit of gold, put it somewhere secure, and rest easier knowing you have a slightly more diversified portfolio and a bit of insurance. At the same time, most of your money is still invested in productive assets like solid companies around the world or a rental property.
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Any quick tips on how to buy gold without having to purchase the book?
In the long run, what’s important is the asset allocation, and I think too often we focus too much on the constituent components. For example, over at Portfolio Charts, they ran some numbers to try and discover the most “reliable” portfolio over all possible 15-year windows. The result was the Golden Butterfly, which is a slight modification of the Permanent Portfolio.
The Golden Butterfly holds 20% gold, and in the context of the _portfolio_ I think it would be a mistake to refer to the gold as a “non-productive” component. If you removed the gold, the characteristics of the resulting portfolio would change drastically, and negatively in the context of reliability as defined in the study.
How well did the Golden Butterfly do compared to other balanced portfolios from the beginning of 1980 through the end of 2000, when the spot price of gold fell by 45%, or nearly 3% per year, losing 7% per year of purchasing power? I’m not trying to pick a fight, but I think these kinds of back-tests are very dependent on the time period used, and gold was an absolute drag on a portfolio for those two decades before going on the fantastic run it has had since 2001. Buying gold when it is over $1200 per ounce is a totally different thing than buying it when it is $400 per ounce. Valuation matters!
@Andy — You’re speculating on portfolio performance, based on a single constituent asset class, and as if you’ve checked the data — which you obviously haven’t. Why didn’t you visit Portfolio Charts and answer this question for yourself? The answer is that the portfolio as a whole behaved quite well. From the “Rolling Returns” tool, you can see that the portfolio returned an inflation-adjusted annual return of over 5% for almost every 15-year rolling window beginning in 1972. See http://go.dafacto.com/twa6n
If Texas Teachers has around a .5% allocation to gold and they have $120 billion in total assets, wouldn’t that make their gold holdings more like $600 million in value?
Isn’t this pointless unless your have millions a few thousands in anything won’t really help or hurt you in the long run, i.e. In your example if you have 100k and invest 1k in gold and gold doubles in value you only made 1k
Buying gold coins will incur numismatic and trading fees not to mention you won’t get the coins at “spot” prices. IMHO, it’s not a good investment.
Jonathan,
I like the idea – is the USMint the best place to buy these? http://catalog.usmint.gov/american-eagle-2016-one-ounce-gold-uncirculated-coin-16EH.html?cm_mmc=Google-_-PLA+-+Gold-_-PLA+-+Gold+-+American+Eagle+Coins-_-16EH_mkwid|shl6n8Kas|crid|100393717273|mp_kw||mp_mt||pdv|c|&gclid=Cj0KEQjw1v66BRCV-6rh6s-Biu8BEiQAelpui0EH-kzyUqe8L_nGx-SiJrRHHV1Mn4k1HkHR_xs2jCAaAsIP8P8HAQ
Thanks,
Ed
Hi Jon,
First of all, thanks to your posts I’m becoming a better investor. I’m new to all this (got about 1.5 years studying and developing my asset allocation) and this has helped a lot. So Thanks 🙂
I have discovered that Gold is a great way to diversify and that it brings stability and less volatility, at least in my experience and my portfolio. At first I was very skeptical, but I’m a huge fan of Ray Dalio, and he encourages to use Gold as part of a wide Strategic Asset Allocation. Although my final Asset Allocation is very new, just about 10months, in the 3 big drops we had in the market in that period it has work like a charm.
I also have use the tools you talked about in past articles (PortfolioCharts.com and PortfolioVisualizer.com) to backtest this, and all the calculators and projections on those sites seems to favor having a little gold in the portfolio. I leave you with this link, were I compare your asset allocation posted on your March 6 2016 article, with my most recent Asset Allocation (with and without 5% gold), and you can see that the one with 5% Gold has a higher CAGR with the lowest Std. Dev., so the best Sharpe Ratio.
http://bit.ly/2387jF1
Ramon
Regards from an Island in the Caribbean 🙂
PS: I have right now some div. commodities ETF in my portfolio, but definitely would be getting rid of those. They don’t make sense to me.
ditto steve… I’d rather pay a few % management fee on an ETF than leave it up to the risk of haggling with dealers. Even if you develop a good relationship, there is a pretty healthy margin built in between sell/buy prices, unless you want to sell P2P with some guy you meet on Craigslist in an Arby’s parking lot. I do have a healthy stack of Krugerrands and Silver eagles stashed away, and occasionally will buy more on dips, but I don’t really consider this a real investment (unless of course ZOMBIE apocalypse). It is fun though to take them out now and again and clink them together. I picture them being something I give my kids/grandkids… that is something with value that they may be reticent from liquidating immediately.
This post feels really out of character for Jonathan… What am I missing?
a lot more typos too.
If you have to pay attention to volatility, as a large pension fund with big annual cash expenses must do, gold could make some sense to smooth out the ups and downs, but not much. For the average investor, your wedding ring is enough exposure I think.
any good resources for purchasing gold/silver?
Having previous experience with BullionVault and GoldMoney, I think BitGold.com offers a nice service. It’s not the same as having gold at home, but the costs are low and the user experience is well designed.
I personally like JM Bullion for silver (sometimes gold too when they have a sale) and Provident Metals for both gold and silver. Now that info is current as of this writing (6-20-16), and note that you will always want to research any company you are considering – even if you have used them before. Some more tips: Google “gold dealer reviews” for a good site for this. You can also google “compare gold prices” and “compare silver prices” for good links to this.