Adding Gold To My Investment Portfolio… Kind Of

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While I’m back home, my parents took the opportunity to transfer possession of some family gifts. Included in them were two one-ounce 24 karat gold bars. I don’t know much about them, except one was given to me when I was born and the other when I graduated high school. The have the words “Swiss Bank Corporation” (now UBS) and a serial number on one side, and here is a picture of the other side:

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At about $650 per ounce, my two ounces would be worth $1300, or about 1.6% of my current investment portfolio. Some sources indicate I may even be able to charge a slight premium for my minted bars. In truth, I’m probably going to end up passing them along to future generations. Is it okay for me to just store these in safety deposit boxes?

I know there is heavy debate in this area, but I personally have no plans to buy any more gold. This is not to say they can’t be a useful part of a portfolio, but I’m still not really convinced of the long-term utility of buying any inanimate objects, including other precious metals and commodities. I’m keeping an open mind, however, if people want to make reasoned arguments either way.

If you are into Modern Portfolio Theory and mean-variance optimization, you might be interested in this Efficient Frontier article on gold:

Make no mistake about it: over the very long term, precious metals equity should provide your portfolio with a mean-variance boost. Just be sure that you?re prepared for the long term?the very long term?behavior of this asset class.

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Comments

  1. Danny at Money Socket says:

    On one hand, it’s a good thing to physically hold your investment and have a tangible asset rather than the rest of our portfolio which is just numbers on a computer screen or a piece of paper. However, its also difficult to truly determine value for a precious metal. You’re correct, its just an animate object. I would buy a gold ring since it looks nice but I don’t know about actual gold bars.

    Perhaps the only case where I would buy gold bars is if I was a person who kept a lot of cash in my house/safe. I would get gold bars instead since you get the satisfaction of having your assets with you but you have to fumble around with physical cash.

    It’s good that you’re just keeping it to pass on, like a collector’s item.

  2. Ted Valentine says:

    It appears that you’re keeping them for sentimental reasons as much as anything. Nothing wrong with that.

    However, if you’re going to consider it a long term investment, ask yourself if you’d withdraw $1,300 from your IRA to invest in gold or would you invest that $1,300 elsewhere “to pass along”?

  3. goldnsilver says:

    Nice! I don’t mind receiving gold bars as a gift 😉

    I’d keep it for sentimental and collecting reasons.

  4. Even though I only “own gold” in the form of a “gold and special minerals” mutual fund, I am starting to see that dedicating at least a small percentage of my portfolio to actual physical gold might not be such a bad idea. Paper assets will always be the majority (I own some real estate as well) but, gold is gold…always has been, always will be. There is a certain security that goes along with possessing something that has been “currency” since the beginning of civilization. I mean, the dollar is only about 200 years old by comparison. Anyone still have any paper currency left over from ancient Rome? (okay, that went a bit far, but you get my point)

    With U.S. budget/trade deficits still very large, I see owning some actual gold as an absolute stop-gap if some kind of financial catastrophe were to occur rendering some paper assets worthless.

  5. i’m still in the gold unbeliever camp. it’s just a pretty object. there’s fake gold and fake diamonds now, who needs the real thing? it has little use other than some electrical application and maybe plating on overprices monster cables..i dont find it rare, there’s tons of it at every jewelry shop, etc.
    at the same time, our dollars our definitely going down the toilet. but usually there is little choice…my tsp plan doesnt let me invest in gold.

  6. Heather says:

    Ted has some really good points. But heck, they are kind of cool!

  7. Nicky Rhee says:

    I wish I kept the magazine, back circa 2000 when gold was still $250-280 per oz, there was a chart of the value of various investments over the past century. Equities wobbled but generally wobbled upward — granted, it wasn’t until 1952 that the Dow reached the level it had in 1929. Gold, however, with the exception of a rise after the price of gold was deregulated in the 1960s, and the big jump in the early 1980s, and despite the Y2K hysteria, the price of gold was the same as it was in 1933 when the FDR made possession of gold illegal.

    I’m sure if the chart was updated to today, there would be another spike because of increased demand and advertisements on tv and radio, but the question is, in 30-50 years, which will increase in value more with respect to inflation: gold or equities?

  8. mugamoodi says:

    it depends on how u see it. I bought some gold around sep 04 for 420$ / Oz including the premium for the american eagle. couple months ago it reached 720$. calculate the return urself… (check kitco dot com for the historical data on gold)

    one more theory is, when the value of dollar (or whatever currency) crashes, gold still stands tall, whatever part of world you’re in.

    Though it sits idle, I can’t resist buying or selling.. may be partly cause I’m from india… (India accounts for 20 percent of annual global demand for gold, devouring 800 tonnes of the metal annually, mostly as jewellery)

  9. How big are they? As gold is one of the heaviest metals, i assume that it is small? like a silver dollar?

  10. Yes, it’s pretty small. I uploaded a better picture.

  11. Not so sure about safety deposit box – whole point of holding it is to hold it.

    Much better idea if one believes in gold story is to look at some of the PM mining assets out there. There’s 1 closed end fund trading at a 13-14% discount that will certainly do well on a gold upswing. And if gold does nothing they’ll keep making money and sending out distributions.

  12. Perhaps the safest and cheapest move would be to sell them and invest the proceeds in GLD – that way you don’t pay safe deposit fees or risk them being lost or stolen yet you still have the asset invested in pure gold. You could pass that stock down to future generations if you wanted to. Not very sentimental…

    I think American Eagles are more collectible than gold bars which would account for their “speculative” pricing (just like state quarters). If you wanted a hard asset that you could pass down – these would definitely be more fun to look at and since they have a date on them – they may be more limited and collectible.

  13. Consider gold in a portfolio for long term. It is especially useful to hedge against inflation, bear markets, or a weak US dollar. ETFs such as GLD (actual gold) and DGL (futures contracts) can be helpful, with GLD being best of breed.

  14. I invest in gold by buying the gold ETF GLD. SSo far so good, but one tip is to keep all your precious metal invetments in your ROTH IRA acct if you can. Since they are precious, they are considered a luxury or something, so the tax you get on your gains is actually higher then stocks (28% or something). So I recommend keeping it in a ROTH IRA optimally, or a tax deferred account.

  15. Hey Jonathan;

    I think that the whole Gold/Equities discussion is really just a discussion of Assets vs. Trust. The whole purpose of currency is to convert heavy physical assets into highly portable forms. The fundamental barter system involves the trading of Assets for Assets or Assets for Services (my 3 chickens for your hunting dog or for a you building me a cabinet).

    The whole purpose of little bars like this is to make trade easy, it’s just way simple for me to give you 230 of these little bars to pay for my house than it is for me to bring 230 equivalently valued cows. Of course, now we have cash and cheque and money orders and mastercard and numbers on an accountants ledger, but they’re not really “worth anything” either, they’re just lighter and (potentially) more secure.

    Now, if you want to keep bars of gold, I say go for it. Those things are just as valuable as dollar bills or cheques, they’re just less volatile on an international level. Personally, I’d just add it to your portfolio for next month as an asset. I know we went through the whole house discussion, but these guys are really a liquid asset, just like cash or stocks.

  16. I bought a gold coin and several silver coins this year, but I don’t consider them as investments. They look very pretty and I will give them to my children as gift later. For investments, gold mutual funds or ETFs make better choice.

  17. C. Maoxian says:

    Think how much more money you’d have today if someone had bought you one “ounce” worth of the S&P 500 when you were born and graduated from college … they little bars are cute and all but get rid of them and invest the proceeds intelligently.

  18. Gold isn’t an investment, it won’t go up and down, it will remain flat for decades matching or beating inflation. If you want some way to store value that can’t be taxed, can easily be passed on, etc then buy gold. If you want something in case the economy collapses gold or silver will help. If you have no faith in the Federal Reserve then buy gold. If you want something that will appreciate in value, then buy stocks or bonds, not gold. Gold isn’t the only precious metal out there either, silver is a bit more practical form of currency than gold.

  19. A bar of gold doesn’t really contribute in a modern portfolio theory sense to your investment portfolio because you don’t rebalance with it. And a portfolio you don’t rebalance doesn’t achieve the same reduction in standard deviation (i.e. risk) that a properly balanced portfolio does.

    So just enjoy that you own something that will hold its value (in an inflation-adjusted sense). There are not so many things that do. Land is one, generally, and so is (well-maintained) guns I believe.

    Interestingly, the guns and the gold are likely to become very valuable in the same (presumably unlikely) scenario, a collapse of currency.

  20. That is kind of a neat thing to have! It’s funny, when I read the headline that said you had a gold bar, I immediately pictured one about the size of a brick, like you see in cartoons…

  21. Having non-correlated assets is one thing, but you need to make sure those asset classes are contributing to your overall return. Gold historically hasn’t done that, although recently it has had a good run which is a bit of an anomaly. If anything, maybe people should be shorting gold. (Reversion to the mean is one investing principle I do believe in…)

  22. Actually, Americans are NOT allowed to own gold in any meaningful quantities. See http://en.wikipedia.org/wiki/Executive_Order_6102
    Reminds me a lot of the good old Soviet Union.

  23. Ted Valentine says:

    For you doomsdayers, sell your gold and buy guns. They’ll be a lot more valuable and useful when the Armageddon comes. My kingdom for a horse!

  24. I like to keep about 10% – 20% of my portfolio in gold/silver stocks just in case. It may end up being a long term drag but it helps me sleep better so its worth it.

    I prefer stocks to actually stockpiling the metal for convenience and because if the companies are well run you can expect dividends and capital gains above and beyond the rise in the underlying metals the companies mine.

  25. SavingDiva says:

    I think the bars are super cute! I would keep them too! They’re a lot nicer than the savings bonds I was given as a child.

    V, I think it was repealed, “The limitation on private gold ownership in the U.S. was repealed by an act of Congress codified in Pub.L. 93-373 which went into effect December 31, 1974”

  26. Why are so many people here so averse to holding some gold as a safe-haven? As long as it isn’t a primary part of your portfolio, it isn’t going to hurt you to “insure yourself” a bit with some gold. It has been the essence of “money” for thousands of years. You can take gold anywhere in the world and it will instantly be recognized for its value, and you will be able to exchange it for goods if needed.

    I am sure that no one predicted that a depression and massive world war was in the near-term in the 1920s, and yet it happened. It taught my grandfather to use his money when he was young to buy some gold coins “just in case”. He ended up being an excellent investor but still has those coins and can now pass them on to his family, just like in Jon’s case. I guarantee you it didn’t hurt his lifestyle one bit, while added some security.

    There is definite value to having small portion of your overall “portfolio” in commodities like gold and silver. You are giving up a small token of the long-term growth you would get in stocks and gaining a small amount of security. In Jon’s case, it is exactly the same as if you spent some of your money on “economic catastrophe insurance”.

  27. James N. says:

    V: Read the end of the Wikipedia article you cited. The limitation on private gold ownership was repealed by an act of Congress in 1974. Still odd and somewhat disturbing that it ever existed, but you are now more than free to hoard massive amounts of gold scattered throughout your house, sewn into your clothing (to make life interesting), or in a giant bin a la Scrooge McDuck.

  28. I’d always heard that physical gold was a bad investment because it is difficult to liquidate and when you do you don’t get market price for it. Anyone have any experience with that?

    Obviously that wouldn’t apply to a precious metals fund or other investment vehicle.

  29. I’ve got some gold. I’ve bought about 10-15 ounces over the past year in bullion (not buying anymore). I mainly did it b/c I was bored and had a lot of time to surf eBay and to read about puchasing gold. My reason for puchasing so much was b/c I was able to find some incorrect spellings and placements (e.g. selling american eagle in the foreign coins, etc.) allowing me to buy for about 10-15% below spot (price of gold if melted).

    I wouldn’t consider it much of an investment as it is true what other’s have said regarding the low level of price appreciation. One piece of advice I will offer is if you want to buy gold to puchase mint graded (NGC or PCGS) coins as they will have value other than just the gold. Coins are cool to look at and a hard investment that you can take anywhere in the world and cash out. This is why I have started buying for younger relatives as they are graduating high school, etc. You can get 1/10 ounce for about $80. It is extremely small but they all thought it was cool when I explained that this miniature coin would get them $50-60 anywhere in the world… “If you ever are stuck while backpacking in Europe u can take this to a pawn shop…”

    In the back of my mind I may be thinking that if Gold goes to price it was in 80s it would be vaued at over $2,000 today 🙂

    FYI, the bars are not much over spot. Coins have a numismatic value and therefore can go for 5-10% over spot (or even more). I understand someone mentioned gold in India as jewelry. Another big reason is gold is used in a lot of technology, especially computers.

  30. I don’t think you’ll be sorry that you have the gold. I’d get a little more, but to each his own. 😉

    Gold’s main strength is that it maintains its purchasing power. Dollars don’t.

    Physical ownership is also the way to go.

  31. Jason Crews says:

    Maybe I missed it, but arn’t stocks inanimate objects? The certificates certainly are.

  32. Gold is like any other investment so treat it that way. There is merit to the argument that it is one of the investments of last resort. The metal has had a long history of being valuable regardless of what was blown up in the world. But let’s face it, if civilization falls, you’ll be more focused on finding food and clean water than trading gold. A decent barter system won’t appear until months after the disaster. So hold it and trade it like you would a good stock. I did. I got a number of coins from my family, and when they doubled in value, I sold them.

  33. Jim ~ mydebtblog.com says:

    I would keep them for sentimental reasons since you got them as gifts. Sure they have some value, and will still have value, but are they investments? My wife has a nice diamond ring but how much value is that diamond worth? To my wife, it is priceless and very sentimental, never an investment. She still has the little 1/5 ct ring I gave long ago on her other hand and we’re saving it if we have a daughter to give it to one day.

    There are too many commercials pushing people to own gold. In a weak economy, disaster, or whatever the case may be a gallon of gas or bottles of water will have more value than gold. Gold is a soft investment, pun intended.

  34. Hey Jim;

    how much value is that diamond worth

    Oh oh, big can of worms there. Suffice to say that due to a certain DeBeers monopoly on diamonds, that diamond has very little resale value. It’s not that the diamond is not a high class luxury item (it is) or non-use in industry (it’s very useful). It’s just that people have been lead to believe that a diamond is a unique gift and that “Diamonds are forever”.

    Diamond dealers actually use the term “estate diamond” to refer to “used diamonds”. As if a “used” diamond somehow had less value. People have been writing about this for decades, but De Beers has managed their monopoly relatively well, even going so far as attempting to trademark the term “Diamond” (to push off the lab rats who are horning in on their mining business). Reading on this is subject is generally very scary for people who own expensive diamonds (try a google search for DeBeers and Monopoly), but let’s say that diamonds are relatively common as far as stones and that sapphires and emeralds maintain their value much better.

    As to the value of gold… in a complete disaster situation nothing is more valuable than food or water or medicine or clothing. However after those are covered, luxury items like gems and gold are valuable b/c they are a simple, portable currency and they are popularly traded. So in a weak economy, hard assets are more valuable and gold and gems fill that role quite nicely.

  35. Now it is more than $1200 per ounce… Almost doubled… while US dollars/stock still didn’t recover…

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