Monday, September 5, 2011

Gold assets shouldn't fill your portfolio

It's hard to ignore gold these days, and most Americans seem to be paying close attention to the metal.

Some 34 percent of respondents to a recent Gallup survey, for example, identified gold as the best long-term investment around. That made it the most popular choice, ahead of real estate (19 percent), stocks/mutual funds (17 percent) and various fixed-income instruments.

Does this mean you should place all, most or even a large slice of your investment portfolio in gold?

Probably not.

After a two-month rally of roughly $400 an ounce, financial advisers still generally view gold as a supplement to a well-rounded portfolio rather than as a core holding. Most advisers don't suggest putting all your eggs in any one basket - gold, stocks, bonds or something else. Some view gold with special suspicion, since it doesn't pay dividends, interest or rent.

"There's no underlying cash flow to the commodity," said Stephen Horan, head of private wealth at the CFA Institute in Charlottesville, Va.

Horan considers gold and other commodities to be appropriate as a modest part of a portfolio.

"It's a nice diversifier when combined with equities because it lowers the overall volatility," he said.

So how much gold might be appropriate? Horan sees a stake for all commodities - including additional metals and other assets such as oil, gas and timber - ranging between 5 percent and 15 percent of a portfolio. Gold, he suggests, should represent less than half of whatever commodity percentage you choose.

Tom Idzorek, chief investment officer at Morningstar Inc. in Chicago, takes a similar view, suggesting a maximum 15 percent stake in gold and other commodities.

Idzorek also recommends against making major changes to your allocation during times like the present, when emotions are running high in the financial markets.

Rick Robinson, regional chief investment officer at Wells Fargo Private Bank in Scottsdale, said his firm hasn't changed its general asset-allocation view on gold and other commodities amid the metal's rally.

If anything, now might be a time to rebalance a portfolio by pulling some money out of gold and directing it into assets that have lost ground, he said.

Robinson suggests commodities make up roughly 3 to 4 percent of a portfolio for conservative investors and up to 6 percent for aggressive individuals. But gold should represent no more than half of that, meaning a maximum stake for gold between roughly 1.5 percent and 3 percent, depending on a person's risk tolerance.

Robinson said he favors metals with more industrial uses that can grow with global economic expansion, such as copper or nickel. "We think the run-up in gold is bubble-like," he said.

Another modest gold recommendation comes from a group you might not expect to have a restrained view. The World Gold Council is a global marketing group for the mining industry and a sponsor of the popular SPDR Gold Shares exchange-traded fund.

The council recently commissioned a study designed mainly for British investors and compiled by British analytical firm Oxford Economics. It recommended that investors in general hold about 5 percent of their portfolios in gold - up to 9 percent in high-inflation periods and for risk-averse individuals.

Unlike some advisers, Oxford Economics argues for slightly higher, not lower, gold holdings for risk-averse investors.

One interesting aspect to that study was an argument advanced by Oxford Economics that gold should fare well amid high inflation as well as deflation. The deflation assumption was based not on past periods of negative inflation but on how the metal might respond if global growth evaporates, governments default on bonds and economic uncertainty reigns.

"In this scenario, the performance of gold receives a major initial boost due to the sharp rise in financial stress," predicted Oxford Economics.

A bullish view for gold within a deflationary scenario is unusual. For example, Ibbotson Associates, a unit of Morningstar, did its own study in 2005 and found that a stronger case can be made for gold when inflation is running high, Idzorek said.

At any rate, inflation seems to be what's foremost on the minds of gold enthusiasts these days.

Recent anxiety about federal deficits, stimulus programs and other potentially inflationary pressures has helped push gold prices higher. How the metal might fare in a deflation environment isn't as well understood.

But regardless of how things ultimately play out, a modest stake in gold is probably all you need.

by Russ Wiles, columnist The Arizona Republic Sept. 4, 2011 12:00 AM

Gold assets shouldn't fill your portfolio

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