Archives for July 21, 2015

Owning a World Market-Cap Weighting of Gold

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2015goldGold is an asset class that is part commodity, part currency, and part insurance policy. As I write this, gold prices are at a 5-year low. I own a little physical gold for cultural reasons, but I don’t consider it part of my asset allocation and I place it in the “too hard to stick with during prolonged underperformance” category.

In a recent WSJ article (paywall) by Jason Zweig, he shares his own opinion (everyone’s got one) while adding this interesting data point:

Laurens Swinkels, a senior researcher at Norges Bank Investment Management in Oslo, reckons that the total market value of the world’s financial assets at the end of 2014 was about $102.7 trillion. The World Gold Council estimates that the world’s total quantity of gold held for investment was about $1.4 trillion as of late 2014. So, if you held the same proportion of gold as the world’s investors as a whole, you would allocate 1.3% of your investment portfolio to it.

Many index funds are constructed by comparing their market-capitalizations, or the total value of all their shares. Apple is currently worth $760 billion dollars, which is 4% of the total value combined of all the companies in the S&P 500 combined. So if you own an S&P 500 Index fund, 4% of your money is in AAPL shares.

So what if you held a world market-cap weighting of gold? If you had a $100,000 portfolio, 1.3% would work out to $1,300, which you could round off to a single 1 oz. gold American Eagle. You could buy gold in another form, but don’t they look pretty? They also make 1/2 oz, 1/4 oz, and 1/10 oz versions. This fake gold coin tester is cool, but is rather expensive if you’re just buying a few coins.

If you had a $1,000,000 portfolio, 1.3% still only works out to 10 American Eagles, altogether weighing less than a pound and something you could still easily hide in your clothing as you escaped to the island nation of St. Kitts (you did buy a citizenship just in case, didn’t you?) just before the apocalypse.

But seriously, it could be that a 1.3% holding is just about the right amount. It’s something, a little exposure, a little insurance policy, something most people could keep in physical form if they preferred with no ongoing storage or management costs. You can justify it as part of the world’s investable market. But it’s not too much, not enough to worry about the price of gold.

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