May 19th, 2014
Money Morning Article of the Week
by Keith Fitz-Gerald, Money Morning
Gold investing in 2014: With gold trading at roughly $1,300 an ounce, many investors are asking themselves if now is the time to buy gold.
I think that's the wrong question.
What they should be asking themselves is if they can afford not to buy it right now.
The case for owning gold has never been more clear...
- Central banks are trillions of dollars in the hole, so they are buying gold as a means of supporting their currencies. According to the World Gold Council, in 2013 net purchases totaled 369 tonnes. That represents 12 consecutive quarters in which the central bankers have reported net inflows, according to the World Gold Council.
- The world is a complicated place, and it's only getting more complicated. As we face war, terrorism, and other ugliness, the need to hedge value is beginning to supersede the need to hedge price. Gold is one of the few assets with that capability - it's physical, it's been around a long time, and it's almost universally recognized as being valuable, even though the markets don't always reflect that.
- Consumers in India and China (who jointly represent three out of every five people alive today) generally believe gold is going to increase in price over time - yet very few actually own it, according to the World Gold Council and U.S. Global Investors. As the economic development in these two countries continues at a rapid pace, overall demand will increase, even if it falls off in developed countries like the United States and in the European Union. Already the statistics are proving this point. Consumer demand in China rose 32% in 2013 to a record 1,066 tonnes, while in India, demand rose 13% to 975 tonnes.
- Gold is increasingly used as a marginable asset, so it's tied inextricably to the worldwide explosion in derivatives and debt-driven trading. If there's one thing we've learned from the financial crisis, it's that debt - like it or not - drives markets. And the more debt there is, the more margin that's going to be required in the years ahead. Recent price-fixing allegations seem to confirm this.
- Best of all, gold is amongst the most hated trades out there right now. In fact, the U.S. Commodity Futures Trading Commission's Commitment of Traders reports suggest the crowd is almost universally against it. Given that "the crowd" is almost universally wrong, there's a lot to be gained from wading in now, even if you have to hold your nose when you do it.
Of course, I am not suggesting that you invest exclusively in gold. Stocks have clearly outperformed gold over the last 125 years. But I am suggesting you buy it as part of an intelligently planned investment strategy.
As for how much gold? That's a very different question - and one I urge you to think about in detail today, because it's going to make a big difference in your overall portfolio performance in 2014. But it's not difficult.
In fact, I have a two-part "cheat sheet" that will help you figure it out to the exact dollar. It's normally reserved for paid-up members of my Money Map Report, but I'm sharing it with you today to help answer the question that's on so many investors' minds. Take a look...
Two Steps for Successful Gold Investing Today
First, make sure you allocate roughly $1 in gold for every $10 you have in bonds.
The conventional thinking is that holding between 5% and 10% of overall assets in gold can provide meaningful diversification and a hedge against inflation. But despite what you see on those late-night television commercials, gold has never been proven to be a significant inflation hedge. It has, however, been proven to be a great crisis hedge and one that is more perfectly correlated to interest rates, which are, in turn, driven by inflationary pressures and global risk, especially lately.
So owning $1 of gold for every $10 you have in bonds is the best way to hedge your risk in today's volatile global markets.
In practical terms, let's say you have $10,000 in bonds. Using the 1:10 ratio, that would mean you'd also have $1,000 in gold socked away using exchange-traded funds, bullion, or something like the very popular Perth Mint Certificates.
Second, maintain that ratio with a 20-minute annual rebalancing.
The gold price is obviously getting fairly volatile these days, so you don't just want to set it and forget it. "Buy and hope" isn't a viable investment strategy. Instead, my suggestion is to rebalance the gold/bond relationship at least annually.
Pick a day like your birthday or the start of the New Year and lock it into your calendar so you don't forget. Rebalancing should take you all of 20 minutes.
I hope you find my cheat sheet useful. But if you are still on the sidelines and waiting for the right "opportunity" to buy gold, you'd be wise to rethink that or risk being too late to the proverbial party.
If I can't convince you, then pay heed to the recommendations of renowned investor and author, Jim Rogers. Mr. Rogers is an advocate of gold as an insurance policy against any financial calamities headed our way - and there are certainly plenty percolating.
Or perhaps the insight of Frank Holmes may help convince you. He is CEO of U.S. Global Investors, which specializes in natural resources and emerging markets investing. Mr. Holmes also believes that the enormous gold demand is an enticing investment. He shares my opinion that gold is leaving North America and the West and heading to India, China, and the East, where the metal is highly coveted.
At the end of the day, whether you own gold as an insurance policy or as an investment is moot. Just make sure you own some.
A NOTE [NOW]: U.S. Global Investors CEO Frank Holmes explains the four main drivers behind the tremendous growth of China's gold market.