The “Small” Role of Gold in a Balanced Portfolio
In their November 2-3, 2013 weekend review of the gold market, the Wall Street Journal concluded that “a small allocation to gold won’t kill an investor’s portfolio, but experts say you should think twice before leaning on it heavily.” The authors don’t define what “small” or “heavy” mean, but a “small” 5% to 10% position in gold has protected some portfolios from paper erosion over the centuries. Gold can provide portfolio balance, plus price appreciation in decades like the 1930s, 1970s, and 2000s, when stocks fell.
There’s also the seasonal cycle to consider. A recent Bloomberg study of gold price data from 2002 to 2011 found that gold’s best three months historically came in the final third of the year. November was the best month of the year for gold (averaging 4.42% gains). September comes next and December is #3. Most of this seasonal demand is based on a series of festival seasons in a variety of cultures – Ramadan in the Muslim world, the Indian wedding season, and Christmas in the west. Then, in February, we celebrate Valentine’s Day and the Chinese New Year. For all of these holidays, gold jewelry is a common gift, so jewelry fabricators tend to order tons of gold in the fall to meet rising demand late in the year.
Gold is an alternative to global paper currency debasement and can be portfolio diversifier. With a modest position in precious metals, investors may be able to improve their overall portfolio performance while reducing their risk.
Written by Gary Alexander