Gold's Epic Plunge Should Cause Reflection On Why You Own It

by: The Financial Lexicon

After watching gold's (NYSEARCA:GLD) biggest two-day plunge in a few decades, it seems like an appropriate time for those who are long gold to do some reflecting on why exactly they own the precious metal. I would encourage silver (NYSEARCA:SLV) investors to join in as well, as silver too has had quite the recent plunge in fiat currency terms.

Every single asset/security I purchase has a role to play as a member of my portfolio. Gold (NYSEARCA:IAU) and silver (NYSEARCA:SIVR) are no different. When reflecting on the recent declines that precious metals have experienced, it is important to think about whether gold and silver are still doing what you intended them to do for your portfolio. The reasons I own gold and silver may be different from the reasons other investors own them. Therefore, we may come to different conclusions about what to do with our holdings in light of the recent epic selloff. The recent declines may also affect us differently, both from an emotional and monetary perspective. But we should all have at least this in common: A clearly defined purpose for owning gold and silver. That purpose will serve as the cornerstone of your reflection.

I own gold (NYSEARCA:PHYS) as a store of value, not as a pure-play inflation hedge. In my book, The 5 Fundamentals of Building a Retirement Portfolio, I have much to say about stores of value, including this: "A store of value is a type of inflation hedge that should protect you from hyperinflation and ensure you carry over wealth to the next monetary system if the current one fails." I don't view gold or silver's role as being the asset that protects me from normal or even relatively high inflation. There are other securities in my diversified portfolio that serve that purpose. Instead, I want gold to protect me from the possibility of today's monetary regime going away and being replaced by something new. Therefore, the number of ounces I own is more important than the dollar value. As such, despite the recent plunge in fiat currency terms, my reason for owning precious metals has not changed and the price movements have no negative consequences for me. If the current monetary regime outlives me, then I will own gold and silver until the day I die. During that time, I will pay a significant amount in storage costs (ETF investors will pay their storage costs via fund fees). In fact, one positive from the recent plunge in prices is that my cash flow will improve as my storage costs, which represent a percentage of the total value of my precious metals holdings, will now decline.

Additionally, when purchasing precious metals, I found it important to find an appropriate balance in terms of how much to buy relative to the entire portfolio. When I reached the point at which I felt like the amount I owned would make a difference should the current monetary system fail, it was not enough to hurt me should the system survive (and I hope it survives) and I stopped buying.

If you have followed a similar line of thinking as I have with your precious metals purchases, you are likely not disturbed by the recent price declines. If, however, you owned gold or silver because you hoped to profit from mark-to-market changes in the price, you should be troubled by the price changes. The price performance has been and continues to be horrific. The charts look awful. And, quite frankly, you are fighting structural deflationary underpinnings which have yet to be met by an amount of money printing that has changed the big picture in favor of massive inflation. That certainly can change. But it might take a long time to do so (if ever). If I owned precious metals in order to realize capital appreciation, I would be an avid chart watcher, since technicals (as much, if not more than fundamentals) seem to have a significant influence on gold and silver prices.

Regardless of the price fluctuations in gold, I think it is a store of value that should play a role in every portfolio (even if that role is a very small one). To again quote from my book, "If you believe in the possibility that the mismanagement of fiat currencies by those in power, a mismanagement that has occurred time and time again throughout monetary history, will one day render today's fiat currencies effectively worthless, it seems prudent to own some gold." It is, however, important to own gold (and other precious metals) within a diversified portfolio. In addition to gold and silver, I own lots of individual bonds in my portfolio (Treasuries and corporates). I also own 27 individual stocks, two equity ETFs, and one high-yield corporate bond ETF.

When reflecting on the recent plunge in gold and silver prices, remember to think long and hard about why it is you own precious metals, whether the recent price drop changes your goals, and whether you own an appropriate amount of the metals relative to the rest of your portfolio. For me, the price drop changes nothing. Gold and silver act as stores of value in my diversified portfolio and they will continue to do so going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long gold and silver.