$GLD, $XAU, $USD
By Jared Dillan
There is a lot of strong feelings about gold.
Some people think it has no utility. Other people have pretty reasoned arguments about how gold maintains purchasing power across the centuries.
It was in a bubble 8 years ago that sucked a lot of people in. There were some sketch-ball commercials for gold on Fox News. The people who missed the bubble spent the next 8 years mocking the people who got sucked into it.
Also, a lot of people think gold is obsolete in a digital world, with bitcoin and all. But crypto is an unreliable store of value, at least for now.
Now, most people are kind of neutral on gold and are off arguing about other things. I am thankful we are done yelling about gold. Because now we can talk about the real reason investors should own gold.
The Real Reason You Should Own Gold
I have been talking a lot about portfolio construction lately.
Most people have an 80/20 portfolio (80% stocks/20% bonds) or a 90/10 portfolio or even a portfolio that is 100% stocks.
Recently, I have made the case for a portfolio that is 35% stocks and 65% bonds. Over the last 20 years, that portfolio has been giving you a little less return, with a lot less risk.
In hedge fund terms, you would say that it has a better “Sharpe Ratio.”
I have been also experimenting with variations on the 35/65 portfolio, with some incredible results. For example, a 35/55/10 portfolio (35% stocks, 55% bonds, 10% commodities) has even better risk/return characteristics. And if your view is that commodities are underpriced, terrific.
But wait, there is more.
How about a 35/55/3/3/4 portfolio? That’s 35% stocks, 55% bonds, 3% broad commodities, 3% gold, and 4% REITs. If you think about what this is, it’s a stock/bond portfolio with a really good inflation hedge.
Note: The risk/return of that portfolio; it gives you almost the return of the 80/20 portfolio with half the risk. And it is mostly because of the gold. Add gold to any portfolio including gold mining stocks and royalty streamers, and the risk characteristics improve.
In the old days, the miners used to be negatively correlated with the broad stock market. That is not quite true anymore, but the correlation is very low.
The 80/20 portfolio is ridiculous with this amount of volatility. The main reason financial advisors put people in this portfolio is because of FOMO (fear of missing out).
They are afraid that if they put a client in a more conservative portfolio, that client will fire them in 2 years after watching all their friends make more money.
You actually can have it both ways.
You can have a portfolio that returns a lot, with a lot less risk. You just have to get creative, and you have to be willing to own some things that you would not ordinarily own.
Real Reason #2
Of course, there are other reasons to own gold.
There’s been a big shift in the Fed’s thinking in the last couple of months. Big… as in, really big… as in, dramatic. At least partially because of the political pressure.
There is a lot to say here, but the TLDR is that the Fed does not seem to care a great deal about high inflation.
The Big Q: Who can blame them?
It is a bit like fighting the last war. Our last bout with high inflation was almost 50 years ago. And it seems like no matter what we do, we cannot cause inflation if we try.
Interestingly, 1 used to be a hard-money guy and had a change of heart. Or an ideological transformation.
The other seat to be filled; there is Zero chance that a Hawk will be appointed? No, here will not be a Hawk on the Fed for years.
Off in upper gallery, you have this discussion on Modern Monetary Theory and how deficits don’t matter. Gold likes those kinds of discussions. Plus, central banks are buying it for the first time in a while.
The fundamentals of gold are lining up for the 1st time in a while. I am not the 1st to observe this. I think people are being very conservative about their gold forecasts, after being burned pretty badly the last time.
I am Bullish, I own it. I think other people should own it, maybe with a bit of risk management this time around.
By Jared Dillan
Paul Ebeling, Editor
Editor’s Note: We will keep trying for inflation, and eventually it will come, make no mistake about it.
Have a terrific weekend.
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