How much Gold should for your investment portfolio? - GerrardsBullion

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How much gold should you buy?

In times of economic instability, investors often buy gold rather than other assets.

Gold is a world renowned safe haven, offering insurance and protection. Historically, it has been a way to protect wealth and making (potentially) healthy returns during times of economic uncertainty.

However, in order to understand if gold is a good investment for you, it is necessary to understand why people buy it and add the yellow metal to their investment portfolio.

What is the place of gold in an investment portfolio?

Savvy investors are aware of the place of physical gold as part of a well balanced investment portfolio. Although gold may have little practical use, investors perceive an intrinsic value in this precious metal. Value that they do not see in any typical currency. Because of this perception, investors tend to buy gold when they are nervous about risks in other investments (such as stocks or bonds) or forecasting high inflation rates. Therefore, physical gold as part of an investment portfolio offers wealth diversification.

Mike Loewengart, vice president of investment strategy for E-Trade says:

“in well diversified portfolios that utilize modern portfolio theory, commodities typically aren’t a dominating presence, but rather a satellite position that can mitigate risk or bolster returns.”

Therefore, you should not abandon your long-term investment plan simply because of fear in stockmarket downturn. At Gerrards, we believe that gold should be an essential part of any investment portfolio as a complementary asset. This is because gold is a hedging asset. Gold safely diversify your portfolio and reduce exposure to stock or bond markets. In fact typically, gold tend to have an inverse relationship to stocks, as the gold price often rises when stock prices drop.

Similarly, a report from the National Bureau of Economic Research authored by Duke University professors Campbell Harvey and Claude Erb (former fixed-income and commodities manager at the mutual fund firm TCW Group) suggest that gold is a decent inflation hedge during long periods measured in decades.

 

How many percent (%) of  my investment portfolio should I allocate to gold?

This question tend to be an emotional topic for investors who are passionate about the risks they see in the economy and the stock market. Therefore, there is no clear answer to that question. Some financial professionals suggest keeping 5% to 10% of your investable assets in gold bullion. Others suggest 10% to 20% (without including home equity)

Nicholas Colas, co-founder of DataTrek Research suggest that:

“The typical weighting of gold in a long-term investment portfolio is 3% to 5%, because gold does tend to provide diversification benefits during periods of inflation and/or market stress. However, I would not recommend more than 10 %, even if one really likes the notional security of gold.”

Another interesting approach to decide how much gold you should allocate to your investment portfolio is to measure the percentage of worldwide financial assets gold bullion represents. According to the World Gold Council, the total value of all the gold that has ever been mined is around $7.5 trillion. This represents about 4 % of the combined value of the global stock, bond and gold market. This 4 % represents a good place to start in determining your portfolio’s default allocation to gold.

However, you could deviate from that allocation if you believe you have good reason to believe that investors worldwide, collectively are wrong about gold’s value relative to the stock and bond markets. In fact, it is important to maintain that percentage through regular rebalancing, buy buying and selling gold regularly.

 

Think in value (£) instead of percentages (%).

Think in terms of percent instead of value is not necessarily a good choice. In fact, in the worst case scenario of a financial crisis, you will need absolute numbers, not percentage. Therefore, the numbers stated above would not be necessarily appropriate. In fact, the lower your overall net worth, the less meaningful percentages are.

Always keep in mind that if you buy gold, it is in order to re-sell it in the future and convert it. You will convert your proceeds (from your gold) to buy undervalued investment, or building a family house, buying a vacation home or supplementing your income during crisis. This point represents the stating point to know if you will have enough ounces. Ask yourself “would my precious metals holding be sufficient to support my standard of living in case of a crisis ?”.

 

How much gold should I buy and how often?

The table below shows you how practical gold can be and how it can be used to protect your wealth.

We draw the table below to give you a better understanding of how much gold you should buy, depending on how long is your investment plan. Bear in mind that the prices below assume that the gold price will keep up with inflation. However historically, gold is likely to surpass Customer Price Index (CPI). As a result, it would be possible that you would need less than what is shown is this table.

Based on a gold price at £936.00 / oz
Monthly Purchase (Pounds £)Equivalent in gold ouncesDuration of your gold investment plan
6 months1 year18 months2 years3 years4 years5 years
£5000.533.26.49.612.819.225.632.1
£1,0001.076.412.819.225.638.551.364.1
£2,0002.1412.825.638.551.376.9102.6128.2
£3,0003.2119.238.557.776.9115.4153.8192.3
£4,0004.2725.651.376.9102.6153.8205.1256.4
£5,0005.3432.164.196.2128.2192.3256.4320.5
£10,00010.6864.1128.2192.3256.4384.6512.8641.0
£20,00021.37128.2256.4384.6512.8769.21025.61282.1

The table below is the equivalent in pound value rather than in troy ounces.

Based on a gold price at £936.00 / oz
Monthly Purchase (Pounds £)Equivalent in gold ouncesDuration of your gold investment plan
6 months1 year18 months2 years3 years4 years5 years
£5000.53£3,000£6,000£9,000£12,000£18,000£24,000£30,000
£1,0001.07£6,000£12,000£18,000£24,000£36,000£48,000£60,000
£2,0002.14£12,000£24,000£36,000£48,000£72,000£96,000£120,000
£3,0003.21£18,000£36,000£54,000£72,000£108,000£144,000£180,000
£4,0004.27£24,000£48,000£72,000£96,000£144,000£192,000£240,000
£5,0005.34£30,000£60,000£90,000£120,000£180,000£240,000£300,000
£10,00010.68£60,000£120,000£180,000£240,000£360,000£480,000£600,000
£20,00021.37£120,000£240,000£360,000£480,000£720,000£960,000£1,200,000

To understand how much gold you should buy, you can do that with the table above in three ways:

  • Method 1: Find the monthly budget that you are able to support if you plan to start investing in gold. This will give you an idea of how long it will take you to realise your investment objective.
  • Method 2: Estimate the total budget you want to allocate to physical gold and view the different options. For instance if your total gold allocation would be 48,000£, you can reach this objective by buying :
    • £1,000 / month of gold during 4 years.
    • £2,000 / month of gold during 2 years.
    • ££4,000 / month of gold during 1 year.

If you have an investment plan of a specific time length (for instance 2 years) because you plan to re-sell 5 years after your last purchase, then the 2nd method will give you a specific idea of which strategy you should adopt.

 

Summary

While physical gold is a safe haven, we would not advise you to allocate your entire portfolio to gold. Physical gold should offer a new dimension to your wealth portfolio, perhaps initially investing only 5-10% of your liquid wealth. Many investors later choose to allocate higher percentages in the future but we find 5-10% is an ideal starting point. We encourage investors to spread their wealth. Diversification is intelligent. Just as property was a good place to invest before the 2007 crash, gold is a solid investment now. We would advise against effectively putting all your eggs into one basket as physical gold is the best way of hedging your other investments.

Spreading your investment interests across stocks, property and precious metals is a wise, low-risk way to manage your portfolio. If your stocks are underperforming, the likelihood is the gold price will over perform. It’s worth noting though, that if your short-term outlook for the wider economy is very positive, then keep your gold investment to a minimum, as it would be expected that the gold price may take a knock as the world economy recovers and begins to grow at a greater pace. It is an unlikely scenario where all investments will be buoyant at any one time; successful investors identify the right markets at the right time, with physical gold being a great exception to that rule as it is such a long-term investment, there is never a bad time to own it.

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