How To Create A Diversified Gold Portfolio

Amongst those of us who agree that the economic downturn in the United States is far from over, the inflation vs. deflation debate—whether inflation, characterized by weakening currency, …

Amongst those of us who agree that the economic downturn in the United States is far from over, the inflation vs. deflation debate—whether inflation, characterized by weakening currency, or deflation, characterized by falling asset prices, will be the bigger problem—is at the center of determining how to preserve wealth and profit in this environment. Regardless of on what side of the inflation vs. deflation debate you fall, there is one thing about which almost all of us can agree: Gold.

Inflationists view gold as a hedge against currency devaluation; deflationists for the most part agree that gold is not as good as legal tender, though expect it to fall less than other assets, and thus still gain purchasing power.

With that in mind, here are my thoughts on creating the ultimate gold portfolio:

Physical gold

Yes, I’m referring to accepting delivery and developing a nice coin collection. To what extent you want your gold portfolio to be in physical gold should be proportionate to how bearish you are. If you are very, very, VERY bearish, I would expect you to want 50%+ of your gold portfolio in physical gold. Personally, I’m looking to get to around 10%.

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Vault gold

Services like BullionVault and GoldMoney are ways where you can get receipts for gold stored in vaults. Thus it is just like owning physical gold, though the gold is not in your possession; instead a secure vault is holding it for you. These services also make it convenient for you to sell your gold in exchange for legal tender. Moreover, some of these services have vaults overseas, the importance of which I’ll get to shortly.

The only question with these services is their trustworthiness.

Gold futures

Perhaps the most common way of profiting from gold is is through exchanges like the New York Mercantile Exchange, which will let you speculate on the futures price of gold. While I recommend having gold positions on exchanges, it is worth noting that there have been many, many reports of price suppression via short selling and naked short selling of gold on exchanges.

Gold stocks

Stock traders can purchase gold via exchange traded funds (ETFs); GLD and IAU are two such ETFs. However, reports of price suppression and naked short selling are even more pronounced for the ETFs than they are in the futures market. While a diversified portfolio would probably benefit from having a position in these ETFs, I would consider gold mining stocks to be a better bet. GDX is an ETF traded on AMEX that tracks gold mining stocks.

Other factors to consider

Gold bugs everywhere fear the resurrection of something like Executive Order 6012, an order issued in 1933 by President Franklin D. Roosevelt which forbade the hoarding of gold coins, gold bullions and gold certificates, and which required all Americans to hand over such gold products to the Federal Reserve. If such government actions were to return, there might be some security in having gold stored abroad in foreign vaults—as well as in collector coins and in jewelry. Of course, whether or not this is true depends on how exactly the government’s response will be enforced.
 

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