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How Much Gold and Silver Should I Buy for My Portfolio?

Jeff Clark, Senior Analyst, GoldSilver 

How much gold and silver should you buy? What percent of your portfolio should they comprise? And should you buy more of one metal than the other?

The conventional gold allocation in a portfolio is 5%. This amount provides “insurance” against a sharp drop in the stock market, because gold tends to perform especially well during stock market crashes

If you believe gold (and silver) are currently undervalued compared to risk assets like stocks and bonds, you may wish to consider a larger amount

Gold and silver have many similarities as investments, but also offer unique benefits separately; you may wish to hold both

These are important questions. Buy too little and precious metals might not make a material difference to your portfolio. Imagine the sick feeling in your gut if, during a crisis, you realize you didn’t buy enough bullion to withstand it (or better still, if you had enough gold and silver, to make a handsome profit from it).

To answer these questions effectively, there are some practical guidelines to consider. And since every person’s circumstances are different, these questions should help you develop a custom-tailored strategy suitable for your goals and risk tolerance.

Here are five key questions to ask yourself. Answer them and you’ll soon have a bullion strategy ideal for your personal situation…

Question #1: What Are Your Goals as an Investor?

The starting point is to understand your goals. The following questions might help clarify why you’re buying precious metals, the first step in determining how much to allocate to them.

Are you buying gold and silver…

For a short-term gain, or as a permanent long-term holding? Or maybe both?

Because they are currently undervalued and you plan to sell when they become overvalued?

As a hedge, because you’re concerned about the potential future downside in the stock market or the economy in general?

For collectible purposes, to potentially earn more profit than standard bullion?

Because you want to own a tangible asset and not a paper form of metal?

As you ponder your goals, keep your risk tolerance in mind. The less risk you want, the more gold you want. That’s because it’s been money for thousands of years and never gone to zero. In a worst-case scenario where everything else has gone to zero, gold will be the last line of financial defense for everyone. And be priced accordingly.

One criticism of gold is that it doesn’t produce profits or pay dividends like stocks. However, it is precisely the lack of those characteristics that gives gold value. Physical gold…

Does not have to please shareholders with quarterly results. Stocks do.

Carries zero counterparty risk. Stocks and most other investments do.

Is a store of value, particularly during crises and crashes. Stocks are not.

Has a limited supply. Stock shares do not, nor does fiat currency.

One of those factors is especially important. Consider just how much you trust a corporate or government entity to hold up their end of the bargain in a widespread, once-in-a-lifetime, systemic financial meltdown. Then consider how your goals match up with this fact:

  • Gold and silver in physical form have no counterparty risk. By owning it, you and you alone possess its full value at all times.

Question #2: What Is Gold’s Price Valuation Compared to Your Other Investments?

Most financial advisors will tell you to “rebalance” your portfolio every year or so. One reason is because the more an investment has risen, the more likely it’s becoming overvalued, and therefore more vulnerable to a decline. Similarly, the more the price of a given investment has fallen, the more likely it is to be undervalued, and the more opportunity you have to “buy low” by rebalancing. So take some profits from the recent big gainers and apply them to the asset classes that are still undervalued.

This concept applies to gold and silver as well. Are they overvalued or undervalued compared to other investments?

One of the more reliable ways to determine if precious metals are over or undervalued is to compare them to the stocks in the S&P 500 Index. Here is the gold price vs. stock market (S&P 500). It's calculated by taking the Index’s price and dividing it by gold’s price). The lower the ratio the more undervalued gold is relative to stocks, and the higher the ratio the overvalued gold is.

The gold price is dramatically undervalued relative to the S&P 500 (as of the end of the first quarter of 2019). This says an investor should expect to get better value right now from gold purchases than from stock purchases. And for those investors with large equity gains, this signals they should consider taking profits and use them to buy gold.

The ratio for silver is even more dramatic:

The silver price is cheaper now, relative to stocks, than it was during the depths of the financial crisis!

Again, you can easily calculate these ratios yourself by dividing the current price of the S&P 500 by the current price of gold or silver.

The reason to buy gold when stocks are overvalued is more important than many investors realize. It’s because…

This makes sense when you think about it. Stocks benefit from economic growth and stability. Gold is more highly valued during times of economic recession and crisis.

Here’s proof. These are the four deepest stock market declines of the past four decades. Look at how gold performed during each.

By a wide margin, gold has served as a better hedge than even US Treasuries!

This is the value gold can provide when stocks enter a bear market, and especially when they crash.

This leads to an obvious point:

  • The more common stock you own, the more gold you need.

Question #3: How Much Gold in a Portfolio Is Needed to Make a Difference?

I shorted the stock market in October 2008, when the S&P fell as much as 33% in one month.

It was great timing! I’d bought shares in SDS (ProShares Ultra Short S&P 500), an ETF that rose twice as much as the S&P fell. It was a short-term trade, and I personally booked a profit of over 50% in three weeks.

You probably think I made a lot of money. Unfortunately, it made almost no difference to my overall portfolio.

That’s because I didn’t buy enough shares relative to the size of my total assets. My position was too small to make any difference to my portfolio – it was so small, in fact, that my net worth still ended the month lower.

I made the correct investment call. My timing was great. But my small position size kept me from profiting.

So how much will make a difference? The traditional rule of thumb is 5%. If you add up all your investable assets, and the amount of physical gold and silver you own totals less than 5% of those assets, it is not enough to have a material impact on your portfolio.

Here’s a practical example: if you have 5% of your assets in gold, and 50% in the S&P 500, then gold needs to rise 400% if the stock market falls 50% just to break even. And keep in mind that bear markets actually last a lot longer than many investors realize.

Remember what happened to me above: even though I had the right investment at the right time, my allocation was too small to make a difference. Don’t make the same mistake with your allocation to gold and silver.

  • Buy enough gold and silver so that your portfolio has an adequate buffer against an equity bear market or crash.

Question #4: How Much Crisis Do You See Ahead?

In a major crisis or recession, that conventional 5% allocation won’t cut it. What passes for “normal” advice could be financially devastating in abnormal times. Furthermore, the lower your overall net worth, the less meaningful these percentages are. Most investors need absolutes, not percentages.

There’s a simple and straightforward reason this is important: gold is one of the best hedges against crisis. Not only can it protect your portfolio and standard of living, it can even, in many cases, net you a sizable profit when almost every other market is in freefall.

More often than not over the past several decades, gold has been the best hedge an investor could hold. Gold even does well in recessions.

So while a 5% position in gold will offer some protection, a major crisis or global event will require a significantly larger position for your portfolio to survive at break-even, let alone with a profit. And as the table above shows, nasty events occur with some regularity. So the more you believe a future crisis is coming (and the worse you think it’ll be) the more gold you need. Want to bet against a recession or crisis? You need less gold.

Given all the reasons to own gold and silver today, we believe this is a time to be overweight. A return to a normal weighting or even an underweight position will come, but given all the risks embedded in the financial system today, it is important to have more insurance in place today than normal, just as you would have more insurance if you moved to Hurricane Alley than if you lived outside of it.

  • Your best hedges against monetary or economic crisis are gold and silver. To be effective, they must be purchased ahead of time.

How many ounces of gold and/or silver might you need for a crisis? To get that answer, ask yourself how many ounces will be needed to support your standard of living during major financial disorder.

Who knows, you might even be able to buy a vacation home with the profits.

Question #5: Should I Buy More Gold or More Silver?

Physical gold and silver share many of the same characteristics. They are tangible assets you can hold in your hand… are portable and can be taken almost anywhere… and are highly liquid and can be sold almost anywhere in the world.

However, each has distinct advantages over the other. See how their differences might help you determine how much of each you want.

Perhaps the most important factor to keep in mind is that silver is more volatile. Which means you stand to earn more profit in a precious metals bull market with it than gold, but lose more in a bear market.

The other important point to keep in mind is that if you’re buying a lot of silver, you’ll probably need to keep the bulk of it in a professional storage account, because it takes up so much space. It’s just not practical (or safe) to keep a lot of silver in the house.

If you do use storage, here’s a money-saving trick I learned: buy bars, because they have lower premiums. It’s also true that gold bars are cheaper than gold coins.

  • The best advice is to have exposure to both metals in your investment portfolio and not just one or the other.