E How Much Gold Should You Own - 5%, 10%, 20%, Even More?

Gold has historically been the world's best store of liquid wealth and defense against potential devaluation of fiat currencies making it an ideal choice to complement and strengthen your portfolio. The question is: "How much gold should you own?" This article discusses a number of different views on the subject in an attempt to help you answer that question.

Asset allocation is usually taken for granted as being a mix of the three main asset classes: stocks, bonds, and cash but this traditional approach is not only outdated but also completely excludes key asset classes such as precious metals (as well as foreign currency, real estate, collectibles, natural resources, and life settlements).

According to Portfolio Visualizer:

  • gold's correlation with equities hovers around zero and
  • gold's correlation with bonds is around 0.3

so it works great for protecting your principal against equity bear markets and inflation. In addition, gold gives you something that you can cash in if equities and bonds go down at the same time enabling you to sustain your lifestyle without having to sell equities or bonds at unfavorable prices.

An analysis of gold’s performance since 1970 shows that gold offers potential preservation of purchasing power in varying inflationary environments:

  • During periods when the annual rate of inflation in the U.S. has been below 2%, the price of gold has risen at an average annual rate of 6.7%.
  • During periods of moderate inflation — defined as an annual increase between 2% and 5% — gold has risen at an average annual rate of 7.4%.
  • During periods when inflation has been running above 5% a year. During such times, the gold price has increased by an average annual rate of 15.2%.

While gold is a smart investment, though, you should only invest a portion of your portfolio in this commodity, not because it isn’t safe to invest in gold, but because you have to build a diversified portfolio to weather the ups and downs of the stock market. Gold, like stocks, doesn’t trade perpetually higher. It fluctuates in value just like any investment so the question remains: "How much gold should you own?"

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