July 17, 2010

Kramer says: You must have at least 1/10 of your portfolio in Gold - I say: Not so fast!

Confused about inflation/deflation? Don't know whether to jump on the bandwagon and buy Gold as everyone else seems to be doing these days? To be honest, I am confused about it just as well.

There is absolutely no question that Gold has had an enormous bull run in the past 10 years. If you had bought Gold say in 2005 at around $450 and kept it until now at around $1200 the price appreciation would be a handsome 1 2/3 or 166.67%. So should you buy now before Gold reaches yet another all-time high?

Jim Kramer of CNBC's Mad Money touted Gold as a must have investment. In no uncertain terms, he said: "Every single person out there should own some Gold." More to the point, he declared that "You must have at least 1/10 of your portfolio in Gold."   “Really?” I thought...


Again, I am not debating that Gold has had a great run in the past few years nor do I question the possibility of Gold having further upside movement – the momentum is certainly there.

But to make a cookie-cutter announcement of a minimum portfolio allocation for Gold is not just questionable, it is dangerous and completely inappropriate for certain types of investors. Short term investors who only have a 2-3 time frame come to mind. Or take retired investors, who rely heavily on generating a safe and regular income, may see themselves loosing out. As a simple insurance policy, 10% seems like a rather high allocation too. More importantly, one should remember that Gold is a commodity, not necessarily an investment, and it “trades” like a commodity meaning, it can be quite volatile at times.

Then there is the cost of holding Gold.  No matter what format you choose for your gold investment - ETF, Gold coins, Gold bullion, Spot Gold, Gold futures etc. - they all carry a cost to hold the commodity.  That cost can range anywhere from a rather inexpensive 0.25% per annum for an ETF (The Gold ETF: IAU just lowered their expense ratio from 0.4% to 0.25%) to one-off fees of 8-10% or even higher for purchases of Gold coins and Gold bullion.  Those fees, along with your investment time frame should be considered when determining what type of Gold investment is selected.

But all of this is purely an academic exercise and the real question still remains as to where the price of Gold is heading.

Jim Kramer, confident as ever, announced that $2000 is the price target.  By contrast, some commentators suggest that Gold has peaked and is about to crash in line with other assets whose prices are threatened by deflation.  James Altucher made some controversial comments in a recent WSJ article when he explained Why Gold Is the Worst Investment Right Now.

The best answer to me came from Adrian Ash, head of research at BullionVault.com:

If I knew a price, I would be doubling up tomorrow.

That element of caution, coming from someone who works for a firm that should be touting Gold, gives me the right sense of how investing in, or as some say “holding” Gold should be approached.  Despite its allure and glamour, it is a commodity and should be “traded” as such.

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