The Gold Factor: Enhancing your Financial Planning Strategy

Modern theories of portfolio management suggest that to protect the portfolio in changing economic conditions, it is prudent to have a percentage of assets whose price is correlated with commodities such as gold and silver.  For most investors, it is not practical to consider holding gold bars, although there are some who hold gold coins or small gold bars in their home safe.  They see this as protection against extreme economic conditions that may impact on their finances.

The alternatives to physical gold may be shares that invest in gold mines or Gold ETFs.

 

If you decide to invest in gold shares, you should consider if the company is producing gold or still in the mine development stage.  Development of a mine and all the infrastructure to export the gold can take up to 20 years and is extremely expensive.  Shares such as Northern Star, Newmont, Evolution Mining and Ramelius Resources are all companies invested in gold and paying dividends and sometimes imputation credits.

 

When it comes to Gold ETFs, there are those that hold physical gold and those that invest in gold mining companies.  ETFs allow the investor to have exposure to gold prices without the need to hold physical gold or companies investing in the gold mining industry.

 

Portfolio Management

Over the years, influencers have developed theories of Portfolio Management.  The basic philosophy is that is you diversify your assets across a range of investments, so when one investment type is falling it is likely another is rising in response to the economic circumstances of that time.  In general, these portfolios hold investments in bonds, stocks (shares), gold and cash.

 

Here are three suggested Portfolios:

 

Permanent Portfolio

The Permanent Portfolio was developed by Harry Browne who was a free-market investment analyst in the 1980s.  The portfolio is designed to perform well in all economic conditions but reduce losses in downturns.  The portfolio equalizes balances between prosperity, recession, inflation and deflation.

 

The asset allocation is 25% each in the following four basic asset types of bonds, stocks, gold and cash.

 

The Golden Butterfly Portfolio

The Golden Butterfly Portfolio was developed by Tyler, author of Portfolio Charts.  This portfolio divides stocks into Small Cap Value Stocks and Large Cap Stocks.  Small Cap Value Stocks are shares that have a small capitalization that are considered underpriced relative to their underlying financial health.  The allocation is 20% to each class of assets.

 

All Weather Portfolio

Ray Dalio’s All Weather Portfolio is designed to perform in all market conditions such as inflation, deflation, and economic growth or decline. Ray Dalio is an investor billionaire and founder of one of the world’s largest hedge funds, Bridgewater Associates.

 

The All-Weather Portfolio has a different set of asset allocations:

 

• Bonds (40%)
• Stocks (30%)
• Gold (7.5%)
• Commodities (7.5%)
• Cash 15%

 

To me, one of the glaring problems with these portfolios is the lack of Real Estate.  For most personal investors, real estate is a significant part of their portfolio. The New Era of Portfolio Allocation with Real Assets (May 2024) gives insights into the importance of real assets, including real estate in your portfolio.

 

Economic Cycles

Portfolio construction is based on the theory that over different economic conditions, different assets will perform better or worse than others.

 

This is a 10-year graph of gold prices:

 

 

This is a 10-year graph of the ASX 200 (Stock Prices)

For some men and women another option is to wear their gold in the form of jewellery. It would be interesting to see how many of these people would consider selling their jewellery if gold prices skyrocketed.

Silver

Silver is a similar commodity and has had an interesting history.  In late 1970s, there was an attempt by the Hunt Brothers to manipulate the price of silver.  They were estimated to have had control of one-third of the silver not held by governments.  This forced the price of silver so high, consumers were selling their silver jewellery to cash in on the craze, while others were buying physical blocks of silver, in the belief it would continue to rise.  In response, COMEX adopted “Silver Rule 7” which limited the purchase of commodities on margin.  This resulted in the collapse of the silver prices as investors who had borrowed to invest, were unable to meet their margin calls.

 

Conclusion

Gold prices are on the rise and predicted to rise by up to $5,000 a once in the near term.  According to Motley Fool Australia, key factors in the gold price will be tariffs, global trade policy, and US dollar strength.

 

For average Australians, having a detailed knowledge of gold price movements is beyond their area of expertise.  However, by keeping a percentage of assets in gold or one of its derivatives may be a sound long-term strategy to maintain wealth in most economic circumstances.

 

Glenis Phillips S FIN – Designer of Financial Mappers and Advice Online