Investing in Gold: Part of a Balanced Portfolio?

When I first started learning about investing, the one thing that always came up was diversification.

It’s almost cliche. If you were to mention investing at a cocktail party, I’ll bet someone pipes up with a “you better make sure you’re diversified, old sport.”

Ok, great. But diversified in what, exactly? “Why, everything, old sport!” Weird party…

The thing is, there’s so much to choose from. You have the basic stocks vs. bonds question, but then you have to ask yourself what kinds of stocks and bonds. You have to choose between industrial sectors, T-bills, blue chips, notes…

Luckily, good ol’ VTSAX makes a lot of the investing decisions easy. Because the total stock market index funds cover every publicly traded company in the United States, you know you have all the sectors covered. If you really want to, just throw in VBTLX (Total Bond Index) and you have all the bonds covered.

But some would say that stocks and bonds are not the only things that make a portfolio diversified – you also need gold. Not just gold, but other precious metals, like platinum and silver.

Investors seem to belong to two distinct factions:

  • Those who think that you should have precious metals in your portfolio.
  • Those who think metals are a load of hogwash and only “preppers” even consider them.

Which brings to mind Ron Swanson’s deep distrust of banks, the government, and keeping his money in anything but gold:

That might be an exaggeration. Many reputable investors, businesses, and institutions incorporate gold and other precious metals into their portfolio.

So does gold belong in your portfolio? I honestly have no idea – I’m definitely not an investing expert! But I thought we could go over the “pros” and “cons” of investing in gold, with some insights from our very own FIRE community.

“Of course you should invest in gold!”

Since I don’t personally invest in gold, I reached out to Othala Fehu to talk more about it. He has written a few posts about his holdings in precious metals, and is even a self-proclaimed prepper, so he seemed like a perfect fit to chime in!

Here’s what he had to say about keeping precious metals as an investment:

I consider the question of holding precious metals to be very similar to the question of allocation between cash, stocks, and bonds. They all have their different strengths, but it is probably best to spread out your capital rather than keep all your financial eggs in one basket.

I can sympathize with that. The stock market can be a wild ride and every investor wants to smooth out the ride and minimize risk. Here’s what he had to say about how precious metals work with stocks in your portfolio:

The markets are the opposite of gold or silver coins sitting in your bank. In short, they are a contrarian play against yourself. That sort of CYA security appeals to me.

So, when stocks are down, gold or silver or palladium is not. That means that your entire portfolio won’t take as much of a dive as it would have it you were completely invested in stocks.

Let’s go over some more reasons for investing in gold:

Gold holds its value. Gold is a valuable physical commodity. In the event of economic collapse, proponents of gold say it could still be used as a currency, while it is assumed that “fiat” currencies like the U.S. dollar would be worthless.

Gold is a hedge against inflation. Gold tends to increase in value as the cost of goods increase (a.k.a. inflation). This helps preserve the buying power of the initial investment, so $1 worth of gold today will still be able to buy the same amount of goods 50 years from now.

Gold diversifies your portfolio. Like Othala Fehu said, precious metals help balance out other investments, like stocks and bonds. The idea of diversification is to reduce the overall risk of your portfolio. To do this, you want to hold investments that do not closely correlate. Gold fits this requirement – when stocks decrease in value, gold increases, and vice versa.

“I wouldn’t touch gold with a 10-foot stick!”

I think it is safe to say that many people in the FIRE community subscribe to the Jim Collins investing mantra: VTSAX, VTSAX, VTSAX.

Given the breadth of his stock series, you would think that he would have written something about investing in gold. As far as I know, he hasn’t, aside from this nugget of a comment. Long story short – he’s not a fan.

The overall point that Jim Collins tries to make is that while precious metals might hedge against inflation, there are other vehicles (like real estate and even stocks) that do just as good, or better. He has an optimistic view of the future, so there isn’t really any reason to distrust the financial markets.

Let’s go over some of the top reasons for why you might not want to invest in gold:

Gold has low returns. Even though the proponents of gold tout its ability to hedge against inflation, it doesn’t keep up with stocks.

From 1972 through 2013, common stocks returned 14.68 percent in falling rate environments while gold futures returned 7.85 percent. In rising rate environments, stocks returned 8.47 percent while gold only returned 4.86 percent. When rates were flat, stocks provided a gain of 10.61 percent and gold returned 8.61 percent.

Gold as an investment is inefficient. There are a few things to consider before you go out an buy some coins. Where are you going to store it? Are you going to buy insurance for it? When you do sell it, who is going to buy it? You are limited to only certain marketplaces to sell gold (you can’t exactly hand over half an ounce of gold at the cash register).

Gold does not produce cash flow. Most investments, even stocks, create some sort of cash flow or dividend in addition to appreciation. Gold may increase modestly in value over time it doesn’t produce income – you can’t live off of gold in retirement like you can stocks or a business. As always, Buffet says it best:

You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all – not some – all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?

Ways to own gold

These days if you want to invest in gold you aren’t limited to stashing away bags of pirate coins in a safe. There’s an ETF for that!

If you plan on making gold and other precious metals a significant portion of your portfolio, you might not want to store physical gold yourself due to its requirements for storage space, security, and insurance.

ETF’s allow you to invest in the value of gold without all the hassle. Funds such as GLD follow the price of gold bullion.

Here’s what Othala Fehu had to say about using a mutual fund or ETF versus holding the physical gold yourself:

If you are investing in PM as a hedge against inflation, then holding stock in Mines/ETF’s and ownership of assets that are not in your hand is fine, but if you are holding precious metals because you fear the collapse of fiat currency, you better have the actual metal in hand.

He makes a pretty good point. How you invest in gold depends on why you invest in gold. If you are trying to protect yourself in the event of an economic collapse, an ETF won’t do you much good!

So how much gold should you include in your portfolio? Here’s what Othala Fehu had to say:

I suggest only a single digit percentage of your overall portfolio should be in precious metals. It is an impractical vessel, but still part of a well-rounded family of assets.

I would agree with that. While it has its advantages, especially as a hedge against inflation, stocks are a more efficient way to grow your net worth.

My perspective

While I have considered investing in gold in the past, I probably won’t be buying gold anytime soon.

There have been times when I was tempted to buy physical gold to have in case of a post-apocalyptic stock market crash (I guess that makes me an almost-prepper?), but in the event of an economic collapse, I question how much gold would really be worth. I would expect the post-apocalyptic economy to be barter based on essential items like food, water, and fuel. Your car doesn’t run on gold.

My primary investment of choice is still stocks. As an alternative to gold, I prefer real estate as an investment. It serves the same anti-inflation purpose, and it goes a step further than precious metals by producing income.

What are your thoughts on gold? Love it? Hate it? Let me know in the comments!

10 thoughts on “Investing in Gold: Part of a Balanced Portfolio?

  • November 13, 2017 at 8:53 am
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    Good breakdown of the two sides of the (gold) coin. I’m personally of the “no thank you” opinion about gold investing. I get why people do it, but it’s just not for me. I have enough optimism in a functioning government and economy, at least for the remaining decades I’ll be alive, to not really worry about prepping. As far as the other benefits of gold, I have enough flexibility that I prefer to just do a buy-and-hold VTSAX style approach and ride out any volatility.

    That said, like with any investment, as long as people can learn for themselves the advantages and disadvantages of the vehicle before pulling the trigger on it, I won’t ever judge someone for deciding it’s right for them.

    Reply
    • November 13, 2017 at 10:30 pm
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      Thanks, Andy! I am of the same sentiment. I trust the world economy to continue churning (I hope that’s not a misplaced trust…). Well said about choosing your own investment. There is definitely a part to every investment that includes the investor’s own comfort level.

      Reply
  • November 13, 2017 at 10:16 am
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    Thanks for this article. I do not think one side of this argument will ever really win. There are 2 camps, you need to decide for yourself where you fit.

    Try holding a gold or silver coin in your hand, see if you like it.
    OthalaFehu recently posted…Why We FightMy Profile

    Reply
    • November 13, 2017 at 10:32 pm
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      Thanks for the help, Othala Fehu! I agree – there’s no “right” or “wrong.” It’s a personal choice that incorporates risk tolerance and other comfort levels.

      Reply
  • November 14, 2017 at 11:42 am
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    Fair and balanced. In our case, we do own ~2% of our portfolio in precious metals (actual coins, ETF’s, and mining stocks). I’m a huge fan of diversification, old chap. I sprinkle stuff everywhere, ‘cuz you just never know what the future holds.

    Reply
    • November 15, 2017 at 5:13 pm
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      Thanks for chiming in, Fritz! It’s good to hear about everyone’s perception of metals. I feel like it doesn’t get talked about very much since it’s usually not a very large portion of one’s portfolio. It’s good that you’re prepared!

      Reply
  • November 15, 2017 at 5:28 am
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    Excellent stuff, Dylan! Makes me think you were at a Great Gatsby themed party recently. 😉

    I once read “Killing Sacred Cows: Overcoming the Financial Myths That Are Destroying Your Prosperity” that talks about the folly of the 401K as is all about real estate as a better choice. The author lays out the case for holdings in gold and actually keeping cash and precious metals in a safe – In case of some disastrous apocalypse. By that point in the book I knew he was a crackpot, but he did inspire me to diversify into real estate at least. 🙂

    Reply
    • November 15, 2017 at 5:19 pm
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      I wish! I bet that would be a lot of fun. That is what I was thinking of though, so good catch 👍

      Haha, glad to hear you didn’t take ALL his advice. Let’s hope he isn’t right…

      Reply
  • November 16, 2017 at 9:58 pm
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    I just don’t think gold is necessary for 90% of people out there. If I were to buy it I would only buy the physical form. It is pure speculation as it produces no income therefore I will leave it to those who fear the end. Then I will really regret it when I need gold shillings to buy ammunition and canned tuna.

    Reply
    • November 17, 2017 at 1:39 pm
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      Or just skip the gold altogether and stock up on ammunition and tuna now! 😉

      Reply

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