A reader asked me to post about the role gold plays in a portfolio. This is something I have written about a lot in the past but it is worth revisiting. I have been a big believer in owning a little gold, one way or another, in a diversified portfolio for a long time.
The important decision is to have some exposure, how to have that exposure becomes less important, IMO, because at different times the metal outperforms and sometimes it is the miners. For most clients I maintain exposure with the streetTRACKS Gold Trust (GLD). On a related note most clients have at least one large diversified mining stock or ETF that owns mining stocks. The focus on the miner for me is not so much gold but mining all sorts of things including gold. Were it not for GLD (or IAU) I would own a narrower gold mining stock. I used to own Anglo Gold (AU) but sold it last February.
The goal with this part of the materials sector is lowering the correlation of the portfolio to the S&P 500 and having a holding or two that has a chance to go up in the face of crisis. These holdings are part of a counter strategy (not a term I invented).
So how much gold? The materials sector (I think of GLD as part of the materials sector) only comprises 3% of the S&P 500. Thinking of gold as being part of the materials sector is not what a lot of people do so you certainly may not want to take my lead here but this is how I think of it. I am overweight materials at around 6%-7% of the portfolio. I might have 2%-3% in GLD, 2% in a diversified mining stock which I sort of think of as being partial gold exposure, and 2% in either a chemical stock or timber REIT (depending on the client).
In accounts where it makes sense to only have two materials positions, either as a function of account size or some other circumstance I might have 3% in GLD and 3% in iShares S&P Global Materials Fund (MXI). I prefer MXI to other ETFs because it has more miners and less chemicals than the others.
On an unrelated note First Trust has filed for a water ETF that is proposed to trade under ticker FWT. According to the paperwork they just filed on February 9th so it could be a couple of months before it lists. I hopped on the PowerShares Water ETF (PHO) right away as I buy into the theme but I would not hesitate to sell it across the board in favor of FWT if I thought it could be a better mousetrap. You can click here to take a peak at the underlying index. There appears to be a fair bit of overlap at first glance but there is no need to solve this now. For the time being, if you care about the water theme just know that another ETF is on the way. I owe a hat tip to IndexUniverse for the heads up here.
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10 comments:
Roger,
I have trouble viewing Gold as an investable asset. To explain, let me describe an admittedly weak and silly example. My auto is not an investment. I may make money or lose money by selling my auto, but it is not an investment. Those gains or loses would be merely speculative. However, the stock of the company that makes my auto can be an investment. I can expect a return on the investment based on both speculation (someone else willing to pay more) or by sharing in the cash flows of the company. There are no such cash flows for gold. In fact, there are only negative cash flows for holding gold, which makes it a poor choice as an investment asset.
Can you help me see the case for owning gold as an investment, or is speculation enough of a reason?
Thanks,
Russ
Russ,
You might be right. Here is what I would say though; GLD is at $65 today. A year ago GLD was at $55 and year before that it was at $45.
If we have have a terror attack again gold will likely go up. If the commodity super bull guys are right gold will likely go up. If anything screwy happens with the dollar gold will likely go up.
You can decide for yourself whether any of those things will play out, whether these points make it investible or whether its potential value as an "insurance policy" against those things holds value for you or not.
Roger, can you clear up a question I have been wondering about for a while. Can you own GLD in an IRA? I know you cannot own "collectibles" and physical gold is considered to be a collectible. Clearly an ETF of gold mining stocks would be OK, but what about GLD?
Linda
GLD is taxed like a "collectible" when held in taxable accounts but can be owned in a IRA
Yes GLD is taxed as a collectible in NQ accounts. A solid mutual fund of miners might be an alternative way to play gold. Tocqueville and Franklin Temp as well as others have some fine one's. Not sure what Roger thinks of these in a NQ area. I use them in NQ for my clients to gain exposure.
Roger, frequently you have referred to X as being a small portion (in this case Gold and Gold mining stocks) as part of your portfolio. Could you do a post on the big picture of your total portfolio: A: x%, B: y% ...
I've owned GLD and precious metals funds a few times the past few years, but I'm starting to look at gold with a contrarian eye.
http://www.kitco.com/scripts/hist_charts/yearly_graphs.
Roger, I asked you to consider writing the column. I appreciate very much you taking the time to write some great thought.
You presented your ideas in a very consice way - thank you. You present a number of issues I will have to explore further.
Thanks again!
I am wondering how GLD would be taxed, if at all, in a Roth IRA?
And I agree with Roger that a little gold exposure would be more of an insurance policy in a portfolio.
I am wondering also how gold and stocks would play out in the world if "24" was a true story? My guess is that gold would pummel stocks. You never know folks.
GLD is not taxable in a Roth
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