With all the current concerns about the US dollar dropping in value, the Dow taking a slide and now a possible breach of the US debt ceiling, you must be wondering,
“How the hell do I safeguard the value of my existing investment portfolio?”
The obvious solution is to convert some of your holdings into precious metals, but if you’re a traditional stocks and bonds guy, you may have your doubts about the validity of investing in gold. For unlike stocks and bonds, gold doesn’t generate any earnings, it pays no dividends whatsoever, and the supply and demand is controlled by goldmines ripping it out of the ground. Compared to other resources like oil or steel, it is used by a relatively small number of industries – namely jewellers, dental services, manufacturing and electronics.
However, what gold has above all these other asset classes is its intrinsic value. Gold is an excellent option as a form of currency as it is always in demand, it can be easily divided, it is difficult to extract and refine, it doesn’t corrode or rust and lastly, it looks just gorgeous. Long before gold was used as a currency, it was a sought after commodity and it held a certain amount of intrinsic value for it’s uses. And it’s that specific intrinsic value that is the basis for it’s worth as a form of currency.
Gold is an excellent option as a form of currency as it is always in demand…
For thousands of years, gold has been highly prized for it’s versatility in making jewellery, however, it has also been used as a way to store value. In today’s society, gold still holds this intrinsic value and is used in investment portfolios as a stable store of value to protect against inflation. That’s why long term investors usually invest in gold not as a way of getting rich, but as a way to diversify their portfolio and protect the value of their assets.
The main reason to include a certain amount of gold in your portfolio is that over time, this gold should maintain it’s value and be worth roughly the same amount over a long period of time. This is particularly useful in times of inflation where the price of gold per troy ounce will rise, but overall the value of the gold is staying the same over the same period. The general idea therefore, is to buy less gold when prices are on the rise, and buy more when prices are on a downward trend.
So how much gold should a typical conservative portfolio be holding?
Well, for long term investors, particularly those who are using their IRA funds to invest in gold, it is generally accepted that around 5 – 10% of your portfolio should consist of gold. Ideally, this gold should be held as a diverse range of forms like physical gold (bars and coins), gold ETFs and shares in gold mining companies. This site has a great article which explains in detail the various gold IRA investing strategies available to investors.
When embarking on a diversification strategy such as this however, it’s worth pointing out the importance of re-balancing your portfolio on a regular basis. This basically means that you should be continually buying gold when prices are low and then selling when prices are high. Take the emotion out of this process and follow a step-by-step investment strategy of building your portfolio using this method. Don’t try to double-guess the market as that will almost always end in failure. Just stick with the buy low, sell high mantra and keep re-balancing your portfolio.
Just to re-iterate – this strategy is NOT for those looking to get rich quick. This is a simple yet very effective strategy for preserving the value of your assets and keep it growing at a pace above inflation. History has shown gold to be an excellent, time proven safe-haven asset that will protect your portfolio from the ravages of currency devaluation and inflation.