The case for a strategic allocation to gold (2024)

FAQs

What is the strategic asset allocation of gold? ›

We find a small though significant allocation of 1 to 2% at low risk and 2 to 4% in a balanced portfolio. While not statistically significant at high risk levels, gold may provide stability in poor markets and economic climates to long-term institutional strategic investors.

Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, it always has maintained its value over the long term.

Then again, it can be smart to invest some of your money in the yellow metal. But, "less than 5-10% of a portfolio should be gold," says Alex Blackwood, CEO and co-founder of Mogul Club. "You can hedge inflation, but when looking for higher returns, look to something with equity value."

You should aim to own around 5-20% of gold in your overall portfolio, with the exact percentage varying based on your age and investor profile. Most experts recommend keeping your gold investment within the range of 5% to 20% to diversify your portfolio and hedge against inflation.

Generally speaking, investors put about 10-15% of their wealth into precious metals. Although gold is under-allocated in investment portfolios, the majority of our clients invest around 10-15% of their assets in precious metals.

Ultimately, gold is a safe haven, and we are not wrong to think of it as such. There will always be a demand for gold, not least because its value is stable and it can provide protection from inflation and diversification for investors' portfolios.

What Has Buffett Said About Investing in Gold? Fundamentally, Warren Buffett doesn't want to own anything that can't produce something, be it income, revenue or some type of profit. To him, gold is the “classic case” of an investment that doesn't produce anything.

See three ways to go about it. Given its low correlation with other asset classes, such as stocks and bonds, gold can provide an important role in portfolios: diversification. Gold's ability to act as a “store of value” can help mitigate risk during times of market volatility and economic uncertainty.

But exactly how much should you put into it? Experts typically recommend devoting between 5% to 10% of your portfolio to it. "This amount aims to balance the benefits of diversification with the unique risks and fluctuations of the gold market," says Nicholas Ganesh, manager at Endeavor Metals Group.

Dividing the total amount of money by the price per troy ounce gives us the total ounces of gold that one can purchase. Therefore, $100,000 divided by $2,018.39 equals approximately 49.57 troy ounces of gold. This calculation provides a baseline for understanding how much gold the investment could yield.

Is it better to hold cash or gold? ›

For short-term needs, cash is better due to its unmatched liquidity. For long-term buy-and-hold investments, gold is preferable to protect against inflation and provide portfolio diversification. The ideal solution is to hold both but allocate based on your specific needs and risk tolerance.

Cons of Investing in Gold

There is no stream of income associated with the investment. Other investments provide income in addition to gains from price appreciation. For example, stocks can earn dividends, bonds can earn interest and investment real estate can earn rent. Extra costs.

There is no legal limit on how much gold a person can own. Gold is a valuable asset and a popular form of investment, and individuals are free to buy and own as much gold as they can afford.

Physical gold and silver investments are subject to capital gains tax, calculated based on the difference between the price you paid and the price you sold it for. The Internal Revenue Service (IRS) classifies gold and silver as collectibles. Hence, they are taxed at a maximum rate of 28% on long-term capital gains.

The second-biggest risk occurs if you need to sell your gold. It can be difficult to receive the full market value for your holdings, especially if they're coins and you need the money quickly. So you may have to settle for selling your holdings for much less than they might otherwise command on a national market.

Rule of Thumb for Asset Allocation based on age of investor

You can use the thumb rule to find your equity allocation by subtracting your current age from 100. It means that as you grow older, your asset allocation needs to move from equity funds towards debt funds and fixed income investments.

Investors desiring to allocate funds to gold should limit their contribution range up to 5 to 10 percent of their overall portfolio. The optimal avenue for investing in gold is sovereign gold bonds (SGBs), as they offer underlying asset appreciation and an additional annual interest coupon of 2.5 percent.

That said, a typical strategic asset allocation for a rather balanced investor could be: 40% cash & bonds, 30% shares, 15% real estate and 15% alternative investments (private equity, commodities and hedge funds).

Strategic asset allocation is a portfolio strategy whereby the investor sets target allocations for various asset classes and rebalances the portfolio periodically. The target allocations are based on factors such as the investor's risk tolerance, time horizon, and investment objectives.