(11/21/14) A Golden Strategy

Gold has taken a tremendous beating in recent weeks and is now tumbling along at four-year lows, explains Keith Fitz-Gerald in Total Wealth.

Love it or hate it, gold is no longer an optional investment. You need gold—in some form—in your portfolio.

It is a critically important risk management tool that can help dampen your portfolio’s overall volatility and also take the sting out of global uncertainty.

Where gold really shines is in protecting your bonds. And that’s about to become a huge issue for millions of investors when the Fed starts raising rates next year.

I suggest owning $1 of gold for every $10 you have in bonds is the best way to hedge the principal value of your bond portfolio against today’s volatile global markets.

As with any long-term investment, consider dollar-cost averaging into your position (meaning you split your capital into chunks and buy equally over time).

Second, rebalance your gold and your bonds at least annually. If you’re not familiar with the concept, in a nutshell, rebalancing means that you’re going to bring the relationship between your gold and your bonds back to the 1:10 level I have suggested.

Now, there’s a lot of debate about which forms of gold are best for investors. That comes down to personal preference. You may like ETFs, coins, bars, or even jewelry. It’s totally up to you. Meanwhile, here are some options available among funds.

Merk Gold Trust ETV (OUNZ) is one of a small handful of gold exchange-traded funds (ETFs) that allows investors the opportunity to turn in their shares for the delivery of actual physical gold bullion, like bars and coins.

Should investors want to take physical delivery of gold tied to the ETF, they can redeem it in the form of London bars. Smaller amounts can be redeemed, too: one-oz.

SPDR Gold Shares (GLD) is an ETF that seeks to replicate the price of gold. I like it because it’s highly liquid. But this is not physical gold and you cannot take delivery. If you don’t want to own physical gold, this makes perfect sense.

Holding a mix of gold and silver bullion, Central Fund of Canada Ltd. (CEF) is traded on the Toronto Stock Exchange in addition to the NYSE. There are no transaction fees other than your broker’s commission.

Market Vectors Gold Miners ETF (GDX) is an ETF that holds a basket of the largest gold-mining stocks. Many of these companies are phenomenally cheap right now, but owning an individual gold miner is very risky.

With this ETF, you diversify your risk across all 100 of the holdings. It also pays a small dividend.

Offered by US Global, Gold and Precious Metals Fund (USERX:US) is a little gem that is a five-star-rated, no-load gold fund focusing on senior producers with the largest market caps in the precious metals mining sector.

In closing, if this is the first time you’ve seriously thought about gold, I totally get it. It’s never been as necessary a part of the investing process as it is today. It’s clearly controversial, there are many ways to buy it, and there’s a lot of opinions about it, not one of which obviates the need to own it.