Stocks, Gold and Today’s Defensively Diversified Portfolio

Is there a place in our portfolios for both stocks and gold? Does investing in one preclude investing in the other?

Ordinarily, according to Wall Street wisdom, you just might be a crackpot if you invest in gold because, as Warren Buffett put it, gold “just sits there.”  Of course most of us are familiar by now with John Maynard Keynes’s characterization of gold as “a barbarous relic.”

Gold investors, on the other hand, like to portray stock promoters as foolhardy speculators who dump cash unthinkingly in companies of dubious value. These include investors who’ve been burned by “hot” stocks that flamed out, leaving nothing but ashes in their portfolios; men and women who are happy with an asset that “just sits there” holding its value instead of self-destructing.

These days gold’s been vindicated.  Seventy years after the death of Keynes, the shiny metal continues to shine, and now that it’s become the best-performing asset class this year, it’s suddenly dawned on investors where to run when they need a safe haven.

But is that all gold is, a safe haven in treacherous times? Or does it have an ongoing function in any portfolio that can genuinely be called diversified?  In its 8 Reasons to Own Gold, thoroughly mainstream Investopedia makes clear gold’s key role in a truly protected portfolio:

“Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, it has always maintained its value over the long term. Through the years, it has served as a hedge against inflation and the erosion of major currencies…”

A historical analysis by Seeking Alpha points out that while some think the choice of gold vs. stocks comes down to nothing more than one’s tolerance for risk, many other factors should be considered when assessing how much to invest in gold, including:

• The pace of economic growth
• Real interest rates
• The U.S. dollar exchange rate
• Momentum in both the commodities and stock markets

I would add: A clear-eyed assessment of how much you can afford to lose as you move closer to a retirement that could last thirty years or more.

A July 25 article in CNBC’s TradingNation paints a much more pugnacious relationship between gold and stocks. As financial writer Alex Rosenberg sees it, that relationship has become “one of outright antagonism.” Or, as he claims in his headline, “If you own gold, you’re basically short stocks,” financial parlance meaning the fact that you own gold means you’re betting stocks will decline. He then presents pretty persuasive arguments urging today’s investors to move into gold.

While I don’t decry stocks entirely, I feel my nest egg is far more secure, and has much more upside potential, particularly right now, with a substantial percentage is parked in physical gold.

The world is changing, and “risk” is no longer an academic concept tied to natural ebbs and flows of markets.  Risk is 100% real these days, and can come at us from new and unexpected places.  It’s daunting to think of saving for retirement, and even actually retiring into such an environment. But we while don’t make the times we do control how we respond to them.  You can mitigate your own risk, or you can fail to act and allow outside circumstances to determine your future. That’s not a risk I’m prepared to take.