The Role Of Gold In Modern Portfolio Theory

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Modern Portfolio Theory was first described in 1952 by the economist Harry Markowitz and its mathematical framework continues to influence investors and financial advisors today. Modern Portfolio Theory seeks to maximize returns while minimizing risk and it applies a mathematical formula to arrive at that decision.

Does gold have a place in modern portfolio theory? It certainly does, and many believe gold should be a permanent part of any portfolio to manage risks. How much gold should your portfolio have and when should you adjust your holdings? Learn about how to best use gold when you learn about modern investment strategies following Modern Portfolio Theory.

Gold Manages Risk

The foundation of Modern Portfolio Theory is balancing risk and reward. When you’re faced with two portfolio options that present the same rate of return, you pick the option with the lowest risk. Gold’s negative correlation to the S&P makes it an effective risk-management investment. It’s all about balancing the risks you take with stocks, so that if markets decline, you can offset losses with gains in gold.

Gold vs. Bonds

Many Modern Portfolio theorists favor the use of bonds in conservative portfolios, up to 50 percent bonds vs. stocks in conservative portfolios for older investors closer to retirement. High net worth investors may want to invest more in alternatives (up to 50 percent) to diversify and commodities like gold and silver should play a major part in your alternatives at the expense of bonds. Casey Research found that in a ten-year period from 2004 to 2014, a 100% gold portfolio would have annualized returns of 12.84% compared to a balanced 60/40 stocks and bonds portfolio with 6.72% returns. That period covers the Great Recession and some big gains for gold, which is why an optimal portfolio uses a combination of gold, stocks, and bonds.

The Right Percentage of Gold

There is no single magic percentage of gold that your portfolio should have, as it will depend on your goals and your age. The percentage of a portfolio given to alternatives (including commodities like gold and silver) can be as low as 10%, while others suggest going as high as 20% on precious metals. The amount you decide on should be influenced by both your personal goals and the market. When bonds deliver low yields and stock markets are struggling, many move their gold holdings up to 20%.

Gold and Silver

When investors talk about “gold,” they often mean both gold and silver. Silver is a best seller at online gold and silver dealers like Silver Gold Bull because it has higher earning potential than gold while still managing risk. A 70/30 silver to gold split puts you in a more aggressive position to benefit from the rising value of silver.

When you’re ready to start investing in gold and silver, one thing to keep in mind is that lower premiums over spot help your return on investment. Online gold dealers like Silver Gold Bull have lower overheads than stores and can offer lower premiums as well as discounts. Major investors won’t have to worry about shipping fees, with orders over $500 covered. Some major online gold dealers also offer allocated storage, so you don’t have to worry about where you’re going to put gold bullion. Start diversifying your portfolio and managing your risks by investing in gold bullion.

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