If you are of the fundamental investment strategy types, you may wonder how you should invest in gold. After all, gold does not have any earnings, pays no dividends, and the supply and demand is by a metal being pulled out of the ground. Compared to oil the uses for gold are little - jewelry, dental, and a few manufacturing operations.
One of the most important uses for gold, however, is money. What makes gold a good currency option is that it is desired by many people, easily dividable, scarce, durable, and my favorite – it’s pretty. But before gold became money, it was a good and it had intrinsic value for it’s uses. That intrinsic value is the foundation for it’s worth.
So, while gold is a good and it’s primary uses are for jewelry, it’s secondary uses are as a store of value. You should look at investing in gold for your portfolio as the same way – a store of value. For the long term investor, you do not buy gold with the purpose of getting rich – you buy it to help protect your wealth.
The goal of gold in your portfolio should always be to be the same amount of wealth over a long period of time. So during times of inflation (like we are seeing now) you will see the price per ounce of gold go up – but essentially the worth and value of gold is staying the same. When prices are rising you will be buying less, and when prices are falling you should be buying more.
For fundamental investing, looking toward the long term – it would be wise to keep about 5% to 10% of your portfolio in gold. How you diversify your gold holdings is up you and your own risk tolerances. Don’t forget to read the Octopus Strategy article I wrote which talked in greater detail about diversification.
Any diversification strategy is taking a major hit if you do not rebalance on a regular basis. Rebalancing ensures that you are buying low and selling high. It will also help build a systematic approach to your portfolio and take away your emotional tendencies which negatively affect the performance of your portfolio. Don’t try to time the market – always be buying, and always rebalance to a predetermined optimal portfolio.
Again, this is not the investment strategy if you want to get rich – but it is a strategy if you want to preserve your wealth and grow it at or above inflation. Gold is a necessary cog in that wheel – I would highly distrust anyone who claims to want to help preserve your wealth but doesn’t buy gold.
Photo courtesy of digitalmoneyworld.