Written by ABC Bullion Chief Economist and Gold Industry Group Project Subcommittee member Jordan Eliseo.

One question we are often asked at ABC Bullion is; how much gold or silver should I hold in my portfolio?

For very good and obvious reasons this is a question we can’t answer, though we do our best to provide our clients with what we hope they value as solid, credible and well balanced educational material to help them with their investment decisions. 

In practice, it is also an impossible question to answer for society as a whole, because it really does come down to a number of individual factors, including, but not limited too:

  • Your age
  • Your income
  • Your family status and obligations
  • Your liabilities
  • Your other assets
  • Your tolerance for volatility
  • When you plan to retire/are you retired etc.

Obviously a young person on a high income with no dependants and decades left in the workforce can probably stomach more volatility than a low income couple with a couple of kids, or a retiree who isn’t planning on working again in the years they have left. 

The assets you already own are also important too. If 100% of your money is in stocks, then you might choose to diversify by moving say 20% into precious metals, but if your major investments are residential property, then the number could be quite different.

Anyone with substantial investments in agricultural land for example already has decent exposure to ‘real assets’, so it could be argued that they require a lower gold allocation than someone with none.

Indeed having had the pleasure of spending time and discussing investment markets and geopolitics amongst other things over dinner with Jim Rickards, I know that he tends to talk about investors holding a 10-20% portfolio allocation in physical gold and silver.

Jim is also known to be a fan of fine art as an investment, which is finite like gold, and, provided it’s a smaller piece at least, can be easily transported.

Investments like fine art are no doubt a viable investment for high net worth individuals and family offices and the like, and they certainly diversify ones portfolio away from financial assets.

Having said that, some of these investments are likely to be beyond the reach of the average Australian, rendering them impractical. In light of that, investors who can’t practically invest in these types of real assets may wish to hold a higher allocation to physical precious metals, as that’s the easiest and most liquid way to hold non-financial assets and diversify your portfolio.

The other question that investors often ask is whether gold or silver are better, but again this is question with no right or wrong answer. In precious metal bull markets, silver tends to outperform, as the ratio between the two tends to narrow.

Therefore, in pure percentage terms, silver is likely to appreciate by more than gold throughout the duration of this precious metal bull market, which I think still has many years to run, but it will almost certainly be more volatile, with far larger price swings and bigger drawdowns.

With that in mind, an investor needs to be comfortable that they can live with the volatility that the silver price displays, as the potential for price appreciation is not the only consideration.

For me personally, I have no problem disclosing that physical gold, physical silver and cash are the major assets I hold in my SMSF right now, and I acquire bullion regularly for my SMSF. 

I am comfortable with the volatility in the metals, for at age 35, I have at least a 30-year if not longer time period before I’ll be looking to use my SMSF assets to fund my retirement. 

Outside of my SMSF, I obviously have different obligations and a different time frame with my investments, and this impacts the way my money is invested.

How about the Permanent Portfolio?

While we can’t recommend a specific gold or silver allocation to our clients, there are portfolios, and portfolio theories out there, which do include strategic precious metal allocations, which investors and clients might find useful to consider.

One of these is the Permanent Portfolio, a subject I’ve talked about in other forums, which I think is an extremely well balanced portfolio.

Incorporating a 25% allocation to physical gold, as well as 25% in the stock market, 25% in the bond market, and keeping 25% in cash, the aim of the portfolio is to stay well diversified at all times, protecting one’s capital from the vagaries of the economic cycle, and the volatility that at one time or another drastically impacts all asset markets.

In Australia, there is a portfolio manager running a strategy that utilises these principals as a basis for their portfolio construction; the Cor Capital Fund.

The backtested return of this strategy over the past 40 plus years, ever since gold was officially demonetized, has been very strong, and with significantly less volatility than that on offer in the equity market, or in a portfolio made up exclusively of stocks, bonds and cash.

Statistic                                 Cor Capital (Permanent Portfolio)    Australian Equities
Highest Annual Return          42.5%                                                 66.8%
Lowest Annual Return           -6.7%                                                  -38.9%
Volatility of Returns               8.9%                                                   23.9%
Number of negative returns   2                                                        12
Annual Average return           10.5%                                                 10.6%
$1 invested in 1970                 $62.12                                                $66.20
Despite the significant correction for gold in 2013, the Cor Capital strategy still had a positive return last year, making it a fund that was able to make money in both 2008 when the GFC wiped out 20-25% of most ‘diversified’ portfolios, as well as 2013, when gold prices suffered their biggest fall of this entire market cycle. 

What I like about this concept and way of investing is that it is an incredibly simple concept to grasp, and, provided one can maintain the discipline, relatively cheap and easy to implement.

I also like it because it contains a healthy but not dominant exposure to physical precious metals, noting that some people might follow the Permanent Portfolio concept as a guide, but use silver instead of gold, or some combination of the two.

History would suggest that a 25% allocation to physical precious metals will in all likelihood protect your portfolio against the types of losses that invariably occur in other markets from time to time, but it also leaves the lions share of your money invested in other areas, ensuring genuine diversification and making sure that as investor, you don’t swap fear of a crashing stock market for fear of a volatile gold or silver price.

This is not to say you are wrong holding a higher (or lower) allocation to physical gold, or silver, and again we have to re-iterate that this investment strategy isn’t right for everyone, but it’s a pretty handy benchmark to keep in mind.