How Much Gold? Depends Whom You Ask

09/30/2011 1:30 pm EST


John Heinzl

Reporter and Columnist,

The Oracle of Omaha may not be too keen on gold, but other experts advise keeping some of your wealth in the precious metal, writes John Heinzl, reporter and columnist for Globe Investor.

I’m interested in buying some gold to protect my portfolio against a global financial meltdown and/or massive inflation, but I’m not sure how much I should own. What do the experts say?

It all depends on which expert you consult. Some investors—Warren Buffett among them—pooh-pooh the notion of owning any gold at all.

"We’re not enthused about gold. People say it’s a hedge against inflation, but that’s also true of oil, land, Coca-Cola, See’s Candies, etc.," he told Berkshire Hathaway’s 2005 annual meeting. "We wouldn’t trade ownership of businesses for a hunk of yellow metal."

Mr. Buffett again dissed gold in an interview on CNBC earlier this year.

Unlike a profit-making business or a rental property, gold doesn’t produce any income, he said. To make money, you have to hope that someone will pay more for your gold down the road.

That’s fine if people become afraid and the price rises. However, "if they become less afraid you lose money, but the gold itself doesn’t produce anything."

Not everyone shares Buffett’s views, of course. On the other extreme are investors who fear that government bailouts and stimulus measures will debase paper currencies and unleash potentially serious inflation. Gold, according to these folks, is one of the best ways to protect yourself.

"We recommend that investors who want to protect their wealth invest at least 25% of their portfolio in gold," authors Claus Vogt and Roland Leuschel write in their 2011 book, The Global Debt Trap: How to Escape the Danger and Build a Fortune.

That’s not to say they expect gold’s rise to be smooth—far from it. "The history of financial markets teaches us that 50% retracements—giving back half of the prior upswing—are both possible and normal within the context of a long-term uptrend."

Indeed, investors got a taste of gold’s volatility this month when the price plunged $214.30 an ounce—or about 12%—over four trading sessions.

A more moderate weighting is recommended in a 2006 report by the World Gold Council, which examined gold’s utility as a strategic asset for institutional investors.

"During periods of fiscal or monetary mismanagement, crises of various kinds or fundamental changes in the dominant currency, gold may be a very useful asset for hedging risk," the report said. "Depending on the assumptions, empirical evidence indicates that as much as 4% gold allocation may provide useful strategic benefits."

Before you rush out to buy gold bars or coins, however, keep in mind that you may already be getting some exposure to gold—or at least gold miners—if you invest in a Canadian stock index fund. The iShares S&P/TSX 60 Index ETF (XIU), for example, includes eight precious metals producers accounting for about 15% of the fund’s weighting.

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