A Happy Medium, Perhaps

The Toronto Star isn't a media outlet that's prone to host gold bulls; at least one of their columnists is a gold skeptic. However, the online version has webbed an article that has some good things to say about gold investing - as a kind of insurance. Half of it is devoted to options that someone who'd like to invest in gold can choose.

A column, from the Australian Manly Daily, has columnist Bill Harcourt talking up gold as a way of diversifying out of bank stocks (and, by extension, regular equities.) He makes a common-sensical point that might as well be an intervention from Captain Obvious: many people are off-put from investing in gold because the hardcore goldbugs seem lunatics.


Putting some gold or gold stocks as an insurance, or diversification, tactic is actually different in kind from investing in gold for the usual reasons. With the insurance mindset comes the acceptance of even a long-term loss on the gold investment, provided that the loss is more than made up for by gains in other parts of the portfolio. You may be interested to know that the original asset-allocation model giving prominence to gold held up pretty well in the gold bear market of 1980-2001. It's called the Permanent Portfolio, and it was introduced by Harry Browne and Terry Coxon back in 1981. The model's as simple as can be: 25% in physical gold, 25% in an equity index fund, 25% in T-bonds and 25% in a safe money-market fund. Rebalancing is done annually, by selling any excess and buying any deficiency to get the percentages back to 25% on rebalance day. I should note that transaction costs and fees don't seem to have been accounted for in the results graph linked to above, so the fees would have to have been kept as close as possible to zero to duplicate those results.


A recent convert to the idea of holding some gold as portfolio insurance is value investor Jean-Marie Eveillard. He recommends no more than 10% be allocated for that purpose, believeing that percentage to be the border line between insurance and speculation.