I previously wrote an article, “I Own Too Much Gold” and I’ve gotten several replies on twitter such as, “Impossible” and “No Such Thing”.
I strongly suspect (although I can’t prove it) these folks didn’t read the article. But in case they did and still aren’t convinced here are five reasons why you don’t want to own too much gold as a percentage of your asset allocation:
Reason 1: Lack of Tax Benefits
In the US, gains on physical gold are taxed as ordinary income, which could be a lot higher for you than the capital gains rate.
Even if you were an uber-gold bull and thought it was going to $100,000 per ounce would you really want to pay all your taxes on those gains as ordinary income?
Why not invest in some gold mining stocks (which would certainly go up as well if gold skyrocketed) and pay the capital gains tax rate? Why not hold some of those gold mining stocks in a Roth IRA so you pay zero capital gains taxes?
Reason 2: Diversification
Sometimes less is more
It’s important to be diversified in non-correlated assets. If I owned no gold, it would be important to own some, as gold tends to be less correlated with stocks and bonds. However, for the same reasons why you don’t want to be all in one asset class, you don’t want have too much of your assets tied up in gold.
If all you own is gold you don’t own any silver! Some speculate that silver will go up in value even higher than gold. If that’s the case you’ll want to diversity your precious metal holdings into the gray metal as well.
Reason 3: Liquidity
If you’re like most people, you need to buy food, clothing, energy, and the staples of living. You want to have some money in a more liquid format so you can pay for these things. If all your money was in gold, how are you going to pay your taxes or buy food?
Reason 4: No Cash Flow
If you invest in a business or a rental property or a dividend paying stock, there is cash-flow. If you own shares of a company, that company has employees trying to grow the business and increase shareholder value. Gold doesn’t do anything of those things. This is okay, gold doesn’t need to do those things (which come with their own set of risks), but if all your money is in gold then you are by definition missing out on opportunities to invest in cash-flow producing assets.
Reason 5: Charity
Wealth is a good servant but a terrible master. Ultimately you can’t take your gold with you and one of the great perks of having extra money (or wealth) is giving it away to those in need!
Do you want to gift your gold to a charity and have them have to deal with selling it?
If you keep some money in local currency it is easier to donate to a good cause. My favorite charitable organization is Children of Hope and Faith they help feed, clothe and educate orphans in Tanzania. I know the founder and board members personally and I know they have very low overhead which means it is efficient and there is more money going to the kids who need it. You can’t get any better than that!
I’m an advocate of holding gold. I think it is a key part of my portfolio but I own too much as a percentage of my other assets.
Datta Phuge
Not counting retirement-specific accounts, gold (and silver) make up 54% of my liquid net worth.
That is way too high for me!
So I decided to read what some public figures have said or written in regard to the percentage of a portfolio that should be gold (and silver).
The following is educational only and NOT SEC-investment-advice. So make up your own mind with the help of an appropriately licensed, registered, and SEC-anointed financial advisor.
Warren Buffett doesn’t like precious metals. He has several famous quotes regarding why he doesn’t like the shiny stuff. While I wouldn’t be surprised if he actually did own some precious metals, but the way he speaks he acts like he doesn’t own any. I’m not a Buffett fan but I think you can learn from him if you carefully sift what he does from what he says or writes.
Mad Money host Jim Cramer recommends no more than 10% in gold. He recommends owning gold via an ETF unless you have enough money to buy physical in bulk.
I’m not a Jim Cramer fan, but I include him because he is a big-time stock guy and yet he still recommends holding some gold. I think there is reason to believe the ETFs don’t hold the gold they claim to so I don’t like gold bullion ETFs. I also disagree that gold is just an insurance policy. Pure insurance (such as term or homeowners) is not an asset, it’s an expense. I think gold is an asset class in and of itself.
Peter Schiff – SchiffGold and EuroPacific Capital – 5-10%
Peter Schiff recommends 5-10% in physical gold. I was actually surprised by this low number because Schiff talks about gold and silver A LOT. Schiff’s 5-10% allocation to gold and silver does NOT include mining stocks–but that is a different topic.
Mike Maloney is the most pro-precious metals person I know of. He is 100% allocated to precious metals with 90% to silver American eagles and 10% to gold American eagles.
I would like physical precious metals to be around 10-25% of my liquid, non-retirement portfolio. I don’t have an opinion on the amount of silver relative to gold. I am of the opinion that silver is more undervalued than is gold and as a result has more upside potential.
I think gold and silver are a great way to preserve wealth but they are not a great way to build wealth since they don’t pay a dividend or yield. For many readers that might be obvious but I’m still learning!
I purchased a lot of gold in 2013, on the heals of the all-time highs, so much of my gold and silver holdings are worth less in fiat than I paid for them. So I intend to reduce my gold holdings as a percentage of my portfolio by focusing my savings and investments on other asset classes going forward. By doing this I can reduce my gold and silver holdings as a percentage of my assets without selling any of my gold and silver.
On the flip side, if my portfolio did have less than 5% physical gold I would consider adding to my holdings via gold maples, silver American eagles, and foreign-stored physical gold via a Goldmoney personal account held by a trusted and low cost custodian.
According to the United States Bureau of Labor statistics the rate of consumer price increases, as measured by the Consumer Price Index (CPI) is 2.4%. That is the combination of a variety of factors such as food, fuel, clothing et al. One of the factors is “Shelter” and the rate of price increases for shelter according to the BLS comes in at 3.3% for the 12 month period ending in march 2018.
It sounds comical for me to write it out but I am passionate about inflation. Inflation is a terrible injustice to the people, destructive to the economy and a leading contributor to many economic crises such as the “dot-com” bubble in 2000 and the 2008 financial crisis.
When I talk about inflation I typically mean an increase in the money supply which in many cases leads to price inflation which is an increase in prices as a result of an increase in the money supply.
I have long believed that the BLS CPI is flawed and that the actual rate of price increases is much higher, between 5-10%. And in fact if the BLS measured price inflation in the same way they did in 1990, the CPI would be 6%.
I recently renewed my apartment lease. My apartment hasn’t changed at all. And after the previous 10 month lease has ended my renewal lease rate is 2.6% higher for a new 12 months lease.
That doesn’t seem like much, and in the grand scheme of things it isn’t, but rent is the largest expense I have so it is an unpleasant increase.
I have to admit I’m not as passionate about the rent being too high as compared to say Mr. James McMillan III, who ran for Governor of New York numerous times, with high rent being a core pillar of his political platform.
Parental warning: Video below contains the “D” word
Healthcare Price Increase
According to the BLS healthcare costs rose 2% for the 12 month period ending March 2018.
I am fortunate (and grateful) to have health insurance coverage through my employer and I would prefer to be in a scenario where health insurance wasn’t tied to employment. I would prefer a true free market system in health care and health insurance. But recently I have been trying, to quote the serenity prayer, to take “as Jesus did, This sinful world as it is, Not as I would have it.”
My health insurance monthly premium actual fell by 0.66%. However, the devil is in the details.
Prior Plan
My previous plan had a $3,000 deductible, 10% coinsurance once the deductible was met and a max out of pocket (or “MOOP”) of $5,000. So if I had the worst year ever I wouldn’t pay more than about $5,000. Since I’m single, relatively young and relatively healthy I think this is a pretty good deal since my monthly premiums are very low.
New Plan
However, this plan was “discontinued” and the new “comparable” plan now has a $3,500 deductible, 20% coinsurance once the deductible is met a $5,950 MOOP.
So this means that while my premiums fell by just 0.66%, my deductible went up by 14.29%, my maximum out of pocket went up 15.97%, and the amount my insurer pays once I reach my higher deductible falls from 90% down to 80%.
I hope I don’t have to use my medical plan at all, and if I don’t I will have saved token amount of money (which I will take!), but if I do have the worst year ever (medically) then I’ll be paying nearly $1,000 more.
Why the Increase?
I’m just one person so it isn’t fair to generalize my experience to the United States as a whole, with this caveat in mind I suspect that the individual mandate being removed has something to do with it.
If people don’t have to buy health insurance anymore then that means there are fewer younger, healthy people buying insurance and on a percentage basis, more sick people with insurance. I’m sure there are a variety of factors as well but this could be part of it.
Of course I think that removing the individual mandate was a good thing–I don’t see how a “free society” can require individuals to buy something.
However, in order for Obamacare to work your really need that mandate. Obamacare made it so that people with pre-existing conditions could still get “health insurance”.
I list “health insurance” in quotes because at this point health insurance in the US is no longer insurance. Insurance is a way of protecting against a potential risk. For example you can’t buy fire insurance when your house is on fire because once it is on fire it is no longer a risk it is a certainty.
But Obamacare made it so that people can essentially buy health insurance after they get sick (they might have to wait until annual enrollment but still).
I want everyone to have access to medical care. Co-opting and ruining the health insurance industry is not a good approach to working towards a world where everyone has access to medical care.
With the individual mandate revoked but the inability for insurance providers to take into account pre-existing conditions means that prices will have to rise. A lot. This is the tradeoff, if you want to force insurance companies to “insure” sick people then the government would need to force people healthy people to buy insurance.
Of course I don’t believe in initiating force to get anyone to do anything. I am saying that in order for this coercive system to work in which insurance companies are forced to “insure” people with pre-existing conditions that you have to coerce healthy people to buy insurance.
What I’m Doing About It
In the short term nothing. I hope to remain relatively healthy and hope I don’t have to foot a $5,000 medical bill any time soon. However, in the medium to long term I have a plan that will help me pay for medical care and fight against health insurance price increases. I’ll write more about this strategy in an upcoming article.
It has been a while since I’ve written about gold. It’s isn’t a good thing to check the price too often or be overly concerned with the month to month price, I’ve come to believe. Gold is a long term hedge against hyperinflation.
However, it is worth noting that gold has been in a bull market since Spring of 2024. It attempted to break through the phycological $2,000 price point in August 2020 then again in March of 2022. But both times sellers overpowered the buyers and gold sold off. The price action was relatively benign in 2023 that gold slowly increased and consolidated. In 2023 it finally broke through $2,000 and held, albeit weakly. But then in the spring of 2024 it strongly broke to the upside and went from $2,050 up to the current price around $2,900.
As someone who first built a gold position in December of 2012, and learned to endure a 3 plus year bear market and a roughly 40% decline in price, it is nice to see the yellow metal making new highs. Will it make it through $3,000? Eventually yes. In the short term only time will tell.
But I will provide a guess here, since there hasn’t been a pull back since January of 2024, gold will struggle to hit $3,000 and if it does, will probably selloff and consolidate more before it makes a definitive move above $3,000 and holds it.
Since I don’t have the gift of auric market prophesy I’ve found the best approach with gold is the boring old but tried and true effective approach of dollar cost averaging and building a position over time. Commodities like gold can be volatile and I do think you can own too much gold (as a percentage of your total assets). As always make your own decisions!
Just about four years ago I wrote the first article on HowIGrowMyWealth.com “Inflation Destroys Dollars“. I wrote about how what I do to protect against price inflation and dollar devaluation. Specifically value investing and precious metals. So in retrospect, how did those investments do?
As a control we’ll add the U.S. Dollar Index ($DXY, shown in green), which compares the dollar’s strength against a basket of other currencies. To represents “stocks” I’d added the S&P 500 Index (SPX) (shown in black).
I’m using the Vanguard Large Cap Value ETF (VTV) as a proxy for value stocks (shown in red). You can see how my current and past individual value stock picks have done here. Gold futures are in yellow and silver futures in gray.
As you can see the S&P 500 has been the place to be. To be fair gold isn’t too far behind. Gold was in fact keeping pace with and surpassing S&P 500 this past April. So while gold has been a good hedge and having exposure to stocks has continue to be important.
Value stocks have lagged the S&P 500, particularly in the aftermath of the December 2018 selloff.
Silver is only slightly outpacing the dollar index, up just 7.15%. Silver has had a few failed breakout attempts, but continues to underperform. The gold/silver ratio that some precious metal bugs talk about would suggest that silver is a better value right now.
Costs continue to rise each year as the dollar loses value. But as measured by the DXY the dollar has kept its value against other currencies.
As I wrote back in November of 2016 in “I Own Too Much Gold“, you don’t want to own too much gold as a percentage of your net worth. The performance of the S&P 500 is a good reason why. If gold ever were to take off a 10-25% allocation would be more than sufficient.
We certainly haven’t see broad hyperinflation yet in the US, but my rent, food and medical costs continue to rise each year in excess of the government measured CPI. As I have for the past four years, gold and precious metals remains an important (albeit minority) portion of one’s portfolio.
If you are just starting to buy precious metals emphasizing silver over gold (while still buying both) could be a good approach.
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