Gold in Your Portfolio: How and How Much?

Roger Nusbaum submits: A reader asked me to post about the role gold plays in a portfolio. This is something I have written about a lot in the past but it is worth revisiting. I have been a big believer in owning a little gold, one way or another, in a diversified portfolio for a long time.

The important decision is to have some exposure. How to have that exposure becomes less important, because at times the metal outperforms and at other times it is the miners.

For most clients I maintain exposure with the streetTRACKS Gold Trust (GLD). Most clients have at least one large diversified mining stock or ETF that owns mining stocks. The focus on the miner for me is not so much gold, but mining all sorts of things including gold. Were it not for GLD (or iShares COMEX Gold Trust (IAU)) I would own a narrower gold mining stock. I used to own Anglo Gold (AU) but sold it last February.

The goal with this part of the materials sector is lowering the correlation of the portfolio to the S&P 500 and having a holding or two that has a chance to go up in the face of crisis. These holdings are part of a counter strategy.

So how much gold? The materials sector (I think of GLD as part of the materials sector) only comprises 3% of the S&P 500. Thinking of gold as being part of the materials sector is not what a lot of people do, but that's how I think of it.

I am overweight materials at around 6%-7% of the portfolio. I might have 2%-3% in GLD, 2% in a diversified mining stock which I think of as being partial gold exposure, and 2% in either a chemical stock or timber REIT (depending on the client).

In accounts where it makes sense to only have two materials positions, either as a function of account size or some other circumstance, I might have 3% in GLD and 3% in iShares S&P Global Materials Fund (MXI). I prefer MXI to other ETFs because it has more miners and less chemicals than the others.

Comments

[Vince]

UNWPX is a well diversified mutual fund for miners of all types