Should You Own Gold in your Portfolio?

Inflation has emerged for the first time in nearly 20 years, and there has been increasing interest in gold as an investment. The highly volatile Bitcoin has been described as a modern “gold-equivalent” because its supply, like gold, is limited. However, Bitcoin is poorly understood by most investors and is frankly too risky. Gold is well understood and is much less risky.

When Would Gold be a Good Investment?

The belief that gold is an excellent hedge against inflation comes from the theory that when prices rise, so does the price of gold.  However, a careful study of the correlation between inflation and gold shows that gold is not a good inflation hedge.  Historically, the price of gold has been about four times the Consumer Price Index, so currently, gold is significantly overvalued compared to inflation.

Gold Holds Up in a Recession

Gold has been recommended as a stable value asset when stocks have significantly increased in value. Indeed, the price of gold and the stock market’s value has little correlation most of the time over long periods. In the recessions of 2000-2002 and 2008-2009, gold did remain stable as the price of stocks fell significantly. However, recently the price of gold has been more correlated with the rising stock market over the last year.

When does Gold Shine?

Gold does best when the US dollar is losing value compared to foreign currencies. Therefore, a weak dollar would benefit holders of gold. A period of rising inflation would tend to weaken the dollar, and that could help gold.  But, rising interest rates tend to suppress the price of gold, and interest rates tend to increase with inflation.

Should you own Gold?

There is a significant reason not to hold gold in an investment portfolio.  It costs to store it, and it does not pay anything, unlike bond interest or stock dividends. A better idea would be to purchase the stocks of gold-mining companies that pay dividends. Barrick Mining and Newmont Mining are two such gold mining stocks that pay dividends.  As we do not recommend having gold or gold mining stocks in a portfolio, an allocation to gold under 2% would be justifiable if it meets the same six criteria above for Bitcoin.
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