Wobbly stock prices are sending many panicked people running scared for gold, sending prices for the yellow metal soaring. Savvy investors should follow suit.
The World Gold Council recently reported that investors sank $3.1 billion into gold-backed exchange-traded funds for the second month in a row during January. That's the fourth consecutive month of net inflows for gold ETFs, with the overwhelming majority of the cash coming from North America over the period.
These inflows helped lift bullion prices even as stock prices sank. The SPDR Gold Shares ETF (GLD) - Get Report , which hold bars of solid bullion and closely tracks prices on gold and gold futures, rallied 6.9% in the three months that ended on Thursday -- a period that saw the S&P 500 retreat by 3.6%.
Why the Gold Fever?
Arthur Hogan, chief market strategist at New York City-based investment bank broker-dealer National Securities, says gold is rallying because "investor appetite for risk is reduced."
He sees three reasons for that:
- Geopolitical Risk. The U.S. trade war with China, the humanitarian crisis in Venezuela, and Britain's planned Brexit from the European Union are three examples of this. Each raises uncertainty for investors about the future, and that tends to make them anxious.
- High Stock Valuations. Investors are also increasingly wary of the stock market that's pricey relative to projected earnings. So, some investors are cashing in at least part of their stock holdings and sending some of the proceeds to gold funds.
- The Federal Reserve. Hogan says the Fed also seems to be at "an inflection point" when it comes to U.S. interest rates. He notes that the investment community went from expecting the Fed to boost rates multiple times this year to now perhaps making no increases in 2019. Lower interest rates tend to weaken the U.S. dollar and boost inflation risks, making gold more attractive. "When anything has a negative effect on the value of the dollar, then gold tends to do better," Hogan says.
Add it all up and it probably makes sense for small investors to follow the lead of professional investors and buy some gold.
After all, gold is like life insurance for your portfolio. We buy life insurance so that our loved ones are taken care of financially if we die. Buying it means that spouses and dependent children taken care of financially if you die.
Having bullion in your portfolio plays a similar role. Gold prices tends to rise when other assets retreat, so the metal will often rescue your portfolio when stocks and bonds crater.
Axel Merk, president and chief investment officer at money-management company Merk Investments, notes that gold has done well in each bear market since 1970 except for the early 1980s pullback, when Federal Reserve Chairman Paul Volcker pushed U.S. real interest rates to high levels. After all, gold tends to fall whenever inflation-adjusted interest rates rise.
But with U.S. real interest rates still historically low today, it looks like there's little holding back gold right now.
Put 5% to 15% of Your Portfolio in Gold
How much gold should you buy?
Well, a little gold goes a long way in a portfolio. In fact, most investment strategists suggest somewhere making gold 5% to 15% of portfolio's value. In other words, a $100,000 portfolio should include $5,000 and $15,000 in gold.
"I've always thought that the right amount is that amount that makes us feel most comfortable," says Hogan. "The more you need to feel comfortable, the more gold you should have."
In other words, if you know you are a nervous Nellie, then buy more gold. But if you have nerves of steel, then you should buy less. And for most investors, buying bullion-backed ETFs is probably the simplest way to get exposure to the metal.
At the time of publication, Constable had no positions in the securities listed in this article.