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Less Gold. More Yield.3 min read

Oct 3, 2018 - John Osbon ( 5 mins to read)

John Osbon

Gold remains an important asset class in global investment markets. With 190,000 tons mined and a market price of $1200 an ounce, the market value of gold is over $7 trillion dollars.

While gold is a meaningful asset class, it has become smaller compared to the rest of the market because its price has been going down since 2011. Is it time to give up on gold? We say no, and here’s why.

Taking gold from 8% to 3%

We reduced gold in client accounts in the third quarter from 8% to 3% across the board. The move had important consequences. Most importantly, the yield on all portfolios went up. We want to capture more yield when we can. Higher yields are available in bonds and stocks, reducing the attractiveness of the no interest, no dividend nature of gold.

It is important to recognize that gold has been in a seven-year flat-to-down stretch, which may persist for some time. Where losses were realized when selling gold, we have used them to offset gains in other asset classes, which can reduce taxes owed for 2018.

Where did it go?

With the proceeds, we reinvested proportionately in the portfolio clients already have. In other words, the 5% from the sale of gold was rebalanced into the rest of the diversified investments. All of those investments have yield.

Is this a step to 0% gold?

No. Gold is an important diversifier and an emergency asset. Moreover, a major asset class like gold is likely to turn around and go up when investors give up and sell it all. We are close to, but not completely at, that capitulation point with gold. The last gold price drought lasted 15 years. When that price staleness finally ended, gold quadrupled in a decade.

Gold is unpredictable and its perceived value is largely driven by what is going on in other asset classes. A roaring stock market generally pushes gold out of favor. Currently, cannabis and cryptocurrencies are all the rage now, and that has distracted investors from gold even though those two asset classes are tiny, well under 300 billion dollars.

One more comment: Barron’s has a knack for putting successful contrarian investments on its cover. Gold was the lead story two weeks ago.

How much gold is there in the world?

The World Gold Council has a neat picture and several telling statistics about gold. The supply of gold increases steadily at 2% per year because of mining.

 

 

 

Total above-ground stocks: 190,040 tonnes

  1. Jewelry: 90,718 tonnes, 47.7%
  2. Private investment: 40,035 tonnes, 21.1%
  3. Official sector (Central Banks): 32,575 tonnes, 17.1%
  4. Other: 26,711 tonnes, 14.1%
  5. Below ground reserves: 54,000 tonnes

Source: Metals Focus; GFMS, Thomson Reuters, US Geological Survey, World Gold Council

What should I do with gold?

My experience tells me that everyone owns some gold, but not much. Most often it is a few coins, some jewelry or perhaps a gift from long ago. The vast majority of people do not own enough to affect their lifestyle or their investment portfolio. It is clearly out of favor these days; I hardly even hear people mention gold now, in contrast to five years ago when its price was a popular topic.

We see gold’s real value in its difference. It often moves in the opposite direction of stocks, especially in times of economic or geopolitical turmoil. It’s a bit of an insurance policy when other markets are stressed. Therefore: If you have less than 3% of your investment assets in gold I encourage you to talk with us to find out why and whether the timing is right for a change.

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