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Posted by on Jan 15, 2014 in Investment Perspective

Gold Fight, Who Wins, Who Loses, What’s Really Important About Gold

Gold Fight, Who Wins, Who Loses, What’s Really Important About Gold

By Roger Nusbaum, AdvisorShares ETF Strategist

Recently the financial blogosphere was treated to a wonk fight between Barry Ritholtz and Felix Salmon over gold. It started with 10 Reasons the Gold Bugs Lost Their Shirts which was torched by Felix with 10 Reasons Barry Ritholtz is Wrong About Gold.

Barry talks about the price action in gold (it was down 30% in 2013), the extent to which investment products that made it more accessible could have contributed its run up starting early in the last decade and the need for some sort of strategy in holding any investment.

Felix then torched him (repeated for emphasis) for making assumptions, being wrong about why people hold gold, flawed logic (in Felix’ estimation) and giving terrible advice (again in Felix’ estimation). Read both articles, it’s worth the time.

While the articles are entertaining they have no impact on whether or not your clients will have enough money when they need it. The question though is whether or not gold can help your clients get to where they want to be; presumably their desired lifestyle in retirement.

Critics of gold, including Warren Buffett will note that gold has no earnings, cash flows or dividends. Of course this is correct. Arguably, the only value that gold has is the price of fear that the market puts on it.

Although there is strong case to refute that argument, gold does have a tendency to have a low correlation to equities (or in the case of 2013 a negative correlation) and often goes up in the face of some sort of external shock that hits equity prices. It also has a tendency to go up in the face of threats of currency debasement which can pertain to various currencies not just the US dollar.

Most people probably know the above argument so the decision to own gold boils down to whether the low or negative correlation matters enough to you, whether it goes up enough and frequently enough in the face of threats to the currency or in the face of external shocks.

Clearly for some people the answer is no but for people who do see portfolio value in these attributes and want to include it in a diversified portfolio the next question becomes how much to own.

The permanent portfolio calls for 25% in gold but that exposes the portfolio to a tremendous amount of volatility, more than most clients probably want. To the extent gold is a diversifier for equity exposure, too much in the diversifier and you no longer have an equity portfolio. When used as part of a strategy to diversify the equity portfolio a small allocation, like low to mid-single digits can be sufficient.