It is estimated that 97% of the general population does not own any physical gold or silver, an outstanding and shocking fact. Why? Because most people simply don’t understand the shiny stuff.

During my time in the industry, I’ve had the privilege of meeting with thousands of investors, wealth managers and other financial types. After all this time, I’ve come to the conclusion that the reason why most people don’t own physical precious metals is simply because they lack a clear understanding and appreciation for the metals. Most investors have very little knowledge on the subject, and those who pretend to, often discount gold as a one-trick-pony that is only beneficial if you expect the global financial system to collapse, in which case you’d trade in your 1 oz Gold Eagles for a bag of groceries.

In part, the industry itself can be blamed for its lack of a clear and uniform message to investors as to why and how they should own gold, but the majority of the blame can be placed directly on the shoulders of mainstream financial professionals who have provided widespread misinformation to their clients about gold ownership for several decades now, or worse yet, no information at all. I’ll be addressing several of the most important topics surrounding gold ownership in the hope it will help others to understand why physical gold ownership is so critical in a well-diversified portfolio.

How Much to Invest

Traditionally, financial professionals and the mainstream media have reported and recommended that investors should allocate 5% to 10% of their portfolio to precious metals. This rubric represents perhaps the single most important piece of misinformation surrounding gold ownership today; because although those numbers were correct at one time, that time was the year 1980. The data used to compute the optimal risk/reward ratio that led to the infamous 5–10% was collected from 1968 to 1980. Leap forward to 2017 (see Figure 1).

Figure 1 computes the optimal amount of gold that a portfolio should have held from 1968 through November of 2016 in order to achieve the greatest risk/reward profile. Surprisingly, the recommended gold allocation should have been 27–30% over the past 48 years, significantly higher than the 5–10% previously reported. There is a simple reason for this difference. Since 1980, there have been several gold bull markets, including an 11-year-run from 2000 to 2011. There have also been several stock market crashes and bear markets, and an extended period of time when interest rates were virtually zero. Given all that has happened in the past half century, it ought not be surprising to anyone that gold should have played a more prominent role in wealth preservation than many mainstream financial commentators thought.

When to Buy

It is my view that one should own gold and silver all of the time. Even if you believe the future is bright, with no economic, geo-political or other problems looming, for the world, the country you live in or yourself personally, you should still own precious metals, always.

That approach simplifies things; i.e. don’t wait for the mailman to be telling you that you should buy precious metals now because he and all the neighbors have been buying lately and prices are way up. Buy now, start today. Don’t try to pick the bottoms or wait for new highs to be reached before acting. Once you’ve begun, it’s easy to fine tune your strategy moving forward. The difficult part for most first-time metals investors is simply getting started.

I often recommend the following approach to new clients. Start by calculating your total net worth. Once you’ve determined that number, begin reallocating assets to achieve the recommended 27–30% (or at the very least, 20%). Once your metals allocation has been achieved, recalculate your total net worth on a quarterly, semi-annual or annual basis moving forward (the frequency is at your discretion), and rebalance accordingly to maintain the 27–30% benchmark.

For example:

If your current net worth is USD$1M, your initial allocation to precious metals should be USD$270K–$300K.

If 12 months later, your net worth has increased to USD$2M, you should effectively double your allocation to precious metals,

bringing the total to USD$540K–$600K.

The same rule applies if your net worth decreases; then you should be shedding a portion of your metals accordingly. This approach may seem overly simplistic, but it removes all the emotional aspects of investing and has been successfully used by some of the world’s wealthiest men to manage their precious metals investments.

Strategies for Investing in Gold

“Gold is a versatile financial and monetary asset that if it is used properly with careful thinking can insulate and insure investors against loss of financial wealth while also providing them with opportunities to greatly increase their wealth.” — Jeffrey Christian, CPM Group

In other words, gold can not only help you preserve wealth you’ve already created, it can also be used to create new wealth. Below are four unique roles that gold can play within one’s portfolio:

1. One part is as “wealth insurance” against both catastrophic financial and political events, but also against smaller problems that can arise. In Figure 2, we see the rise of gold’s value during the last financial crisis (the period of time indicated between the columns). The yellow metal rose as much as 140% during that time, helping those who held it to offset major losses they suffered in other asset classes.
2. A second part of one’s precious metals holdings should be a core portion of one’s wealth which is a long-term holding, a base of wealth (as opposed to investments) that the individual adds to and tends not to draw upon except for emergencies or exceptional investment opportunities or major life changes.
3. A third part should be more investment oriented, where you buy gold when the economic and political worlds suggest it is a good time to buy and hold it, or when financial markets are scary or gold’s fundamentals suggest prices should be expected to rise, and you reduce your gold holdings when the world around you and market trends suggest that you should lighten up on precious metals and shift some of your investible funds from metals to stocks, bonds, or other investment asset classes.
4. A final portion might be a shorter term, more speculative or opportunistic investment, which could include shorting gold or performing swaps between the different metals themselves depending on the current metal ratios (e.g. gold vs. silver ratio or gold vs. platinum ratio).

In conclusion, if you haven’t done so already, begin allocating some of your wealth to precious metals now while prices are relatively soft and premiums are low.

Secondly, be informed and help to inform others who may not be as far up the model line as you are. Email me (or professionals like myself) personally. I’d be happy to provide you with my thoughts and access to my network of resources that will allow you to be prepared and well informed when it comes to precious metals investing.