How Much Gold Allocation in Your Portfolio?

How Much Gold Allocation in Your Portfolio?

The gold price is making new heights everyday and I receive tons of queries from the readers that, How much gold allocation one should done in his/her portfolio?

Many people ask me that, Should they put 100% of their money in Gold by taking out all of their money from equities?

Well, I personally advise people to invest not more than 10% of their portfolio net worth in Gold. This is because we don’t have any proper valuation method for Gold.

According to RitHoltz,

When evaluating equities, one of the key metrics we use is Valuation. We can determine an approximate value based on earnings, dividend yield, discounted cash flow, etc.

That is not possible with Gold. People have tried to develop a model for the price of the precious metal (See Eddy’s attempt here), but it always is relative to something else — inflation, interest rates, Oil, Silver, etc. Indeed, an inability to objectively value Gold — other than what someone else is willing to pay for it — is why I am not enthusiastic about any more than a 5% position. With no objectively ability to value it, we are left with technicals, historical comparisons, and the Greater Fool theorem.

Let’s consider 3 different ways to contextualize the price of Gold:

1) Relative to the US Monetary Base;

2) Gold versus the SPX; and

3) On an Inflation adjusted basis. All three of these suggest Gold has more upside over the next few years. (Traders wanting to add should look for a pullback, rather than chasing momentum here).

The only problem with gold is that, it does not have any income/cashflow and that’s why it’s next to impossible to valuate the gold.

Businesses have cashflow/profits/income and that’s why we can accurately do the valuations of the businesses. But well, this is not true about gold.

And on the top of that, Gold does not have any utility like businesses. Right now the gold price is shooting up because the US Government is expanding its monetary base like hell. And this newly printed dollars ar diluting the purchasing power of the existing gold in the economy.

So remember that, Businesses (Stocks & Equity Mutual Funds and Equity related instruments) are more valuable than the gold and this is the reason why I advise people to invest most of their money in Equity/Businesses and just 5-10% of their total portfolio net worth in Gold.

Your portfolio should have 5-10% Allocation in Gold and rest should be in Equity, Debt and other asset classes. Never invest more than 10% of your total portfolio net worth in Gold.