A common question asked by investors is: what quantity of gold is enough to protect and grow your wealth?
Should you buy both gold and silver or simply choose to invest in one of them? More importantly, does investing in precious metals come at the expense of greater returns in other markets such as stocks and bonds?
Most investors understand the principle of portfolio diversification and the importance of NOT putting all your eggs in one basket. Gold and silver are safe haven assets and offer true diversification – they are independent and act as a hedge from government policy, economic meltdowns and potential devaluation of digital and paper fiat currencies such as the U.S. dollar, euro, pound and others.
Because precious metals act as your most dependable portfolio insurance, how much gold and silver should be in your portfolio? 10 ounces? One kilo? 10% of your wealth?
There is an old Wall Street saying that goes: put 10% of your wealth in gold and hope to God it doesn’t go up!
This is for the simple reason that the other 90% of your portfolio will tend to gain in value as economies grow. This saying carries more wisdom that many people realise, although as we shall see later, 10% is simply a rough guide that doesn’t apply to everyone.
This chapter will explore important considerations for any gold buyer or investor to help you determine how much gold and silver you should buy. Ultimately, the quantity you purchase will be a personal decision and it should fit your unique circumstances and financial position. This is why we offer our clients strategy sessions and consultations.
Gold Is Like No Other Asset
Gold and silver are very different from other assets, so how you buy them will be determined by a different set of guidelines than say stocks or bonds.
Many investors make the mistake of comparing gold and silver to common investments; how much will I gain in three years? What income will I derive from my precious metal portfolio annually?
The amount of gold and silver you invest in should be determined by other factors aside from your investment goals. Unlike stocks, bonds or property, gold has unique characteristics that include:
- Lack of or inverse correlation to other assets or currencies
- Intrinsic and inherent value in and on its own
- Extreme rarity and inability to be duplicated, manufactured or digitally mass produced
- A tangible, portable and universally accepted form of wealth and money
- A 5,000-year history as a form of savings and wealth protection
Buying precious metals is in many ways a lot like buying life, fire, or theft insurance. You never know when or where disaster might strike, or how long the chaos will last. Just like any insurance, you cannot buy gold when you need it the most; in the middle of a crisis. When crisis strikes it is generally too late to buy insurance.
However, unlike insurance, gold and silver also have great potential for returns and profit. In the last century and in this, gold and silver’s strong returns especially during times of crisis is well documented. Experts agree that gold and silver are considerably undervalued by all accounts. What’s more, the reasons for buying gold and silver NOW are now more pertinent than ever before.
All things considered, gold is like a potentially very profitable form of insurance, so how much you buy will be determined by unique personal circumstances as discussed below.
Before we look at the figures, let’s put our current geopolitical situation in context.
The Future Is Uncertain
The role of gold and silver in your portfolio will be determined by the following:
- What are the risks prevailing in the economy today?
- How will the over valuation in most asset classes be corrected?
- How much trust do we have in current economic policies?
- Is another financial crisis imminent (huge fiscal deficits, excessive public debt etc)?
- Isn’t currency devaluation almost certain?
- Aren’t geopolitical risks in the world likely to escalate?
That we live in uncertain times is not in doubt; few economists and financial experts agree on what the next 5-10 years will look like. For example:
- Will the Federal Reserve raise or lower interest rates?
- How will Brexit affect the world economy?
- Will the trade war between the U.S. and the rest of the world harm the world economy?
- Might the India versus Pakistan, Iran versus Israel, US versus North Korea flare ups end up in nuclear war?
- Will tensions between the U.S. and strategic competitors Russia and China result in war?
Depending on who you ask, the answers to the above questions will vary from cautiously optimistic to extremely pessimistic. If history is any indication, no one really knows what will happen next week, let alone next year. This makes investing in traditional asset classes such as stock, bonds and even property increasingly risky.
It is this uncertainty that should drive your decision to diversify into gold and silver. Rather than wonder what the chances are of your house burning down next week, focus instead on how much insurance cover you will need if that scenario occurs.
To use the Wall Street saying as a guide, 10% of your wealth means different things to different people. An extremely wealthy individual who can spare say $10m can buy about 250 kilos of gold; enough to keep several generations living very comfortably through financial crisis and economic depressions.
On the other hand, an individual who can afford to invest $3,000 in gold every year will no doubt need to make different calculations when buying gold.
Ask yourself this: How much gold will I need to protect me financially, if markets and banks close for a period of time and I cannot access my savings?
How Much Gold Will You Need in A Crisis?
The simple way to look at this is to refer to previous crises. During the 2008 financial crisis, for example, many stocks and mutual funds lost much of their value – frequently as much as 50% and sometimes more.
In times like these, liquidating your investments in stocks and bonds to pay for groceries, a mortgage, or rent will certainly yield very little money. What’s more, selling when the market bottoms out will result in a massive loss on your hard-earned savings.
Wealthy individuals such as Warren Buffet invested billions of dollars in the collapsing stock market because they could afford to ride out the storm. They ultimately reaped strong returns on stocks bought at pennies to the dollar. On the other hand, gold rallied to record highs, and provided a handsome profit for those who had invested in the precious metal.
In such a scenario, selling a little of your gold at a time can help you weather the storm in the markets, until hopefully, the economy recovers, and markets rally once more as it happened after the 2008 crisis ended.
How much gold you need is therefore complicated and will depend on very many factors, including the severity of the crisis, amount of cash you have on hand, and your immediate needs. For example, a family fleeing the war in Germany needed much more gold than a family without food during the Great Depression, or say, a Venezuelan family in the middle of the country’s current economic meltdown.
While 10% of your wealth is usually proposed by many, its best to remember that no strategy is perfect. What is certain is that investing nothing in gold exposes you to serious financial risks should a geopolitical or financial crisis erupt.
During times of relative stability and prosperity, 10% is the rule of thumb. However, as the economic climate becomes more volatile and geopolitical risks increase, you should raise your allocation to gold as much as necessary to effectively protect your wealth.
How Much Silver Should I Own?
Silver has been called the poor man’s gold for good reason. Although less valuable than gold, both metals have intrinsic value and act as an effective hedge against uncertainty and currency devaluation.
At current prices, silver is grossly undervalued when compared to most assets including gold. One ounce of silver is worth 85 times less than gold but also offers protection to your wealth. The affordability of silver makes it possible for anyone to buy small quantities regularly to build a sizeable portfolio over time.
As a result, many experts recommend a precious metal portfolio that ideally consists of 75% gold and 25% silver. This is because the silver price tends to be more volatile than that of gold and will therefore have a larger impact on the value of your precious metal portfolio as its price fluctuates.
When considering how much gold and silver should be in your portfolio, bear in mind the main reason why you buy precious metals in the first place; to insure against financial and economic disaster.
Considering the current volatile economic climate, buying gold and silver now makes perfect investment sense, both from a hedging and safe haven perspective and the potential returns to be made in the medium to long-term.