Owning a World Market-Cap Weighting of Gold

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2015goldGold is an asset class that is part commodity, part currency, and part insurance policy. As I write this, gold prices are at a 5-year low. I own a little physical gold for cultural reasons, but I don’t consider it part of my asset allocation and I place it in the “too hard to stick with during prolonged underperformance” category.

In a recent WSJ article (paywall) by Jason Zweig, he shares his own opinion (everyone’s got one) while adding this interesting data point:

Laurens Swinkels, a senior researcher at Norges Bank Investment Management in Oslo, reckons that the total market value of the world’s financial assets at the end of 2014 was about $102.7 trillion. The World Gold Council estimates that the world’s total quantity of gold held for investment was about $1.4 trillion as of late 2014. So, if you held the same proportion of gold as the world’s investors as a whole, you would allocate 1.3% of your investment portfolio to it.

Many index funds are constructed by comparing their market-capitalizations, or the total value of all their shares. Apple is currently worth $760 billion dollars, which is 4% of the total value combined of all the companies in the S&P 500 combined. So if you own an S&P 500 Index fund, 4% of your money is in AAPL shares.

So what if you held a world market-cap weighting of gold? If you had a $100,000 portfolio, 1.3% would work out to $1,300, which you could round off to a single 1 oz. gold American Eagle. You could buy gold in another form, but don’t they look pretty? They also make 1/2 oz, 1/4 oz, and 1/10 oz versions. This fake gold coin tester is cool, but is rather expensive if you’re just buying a few coins.

If you had a $1,000,000 portfolio, 1.3% still only works out to 10 American Eagles, altogether weighing less than a pound and something you could still easily hide in your clothing as you escaped to the island nation of St. Kitts (you did buy a citizenship just in case, didn’t you?) just before the apocalypse.

But seriously, it could be that a 1.3% holding is just about the right amount. It’s something, a little exposure, a little insurance policy, something most people could keep in physical form if they preferred with no ongoing storage or management costs. You can justify it as part of the world’s investable market. But it’s not too much, not enough to worry about the price of gold.

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Comments

  1. That’s an interesting asset allocation strategy. I have about 1% of my net worth in physical gold right now for collecting purposes as a hobby. Other than the gold portion it might be interesting to know how the remaining $101.3 trillion of financial assets is broken up. Maybe we can build a portfolio of stocks, bonds, real estate, cash, etc in similar proportions to global assets to create the ultimate diversified portfolio. 🙂

  2. Yes, my approximate 5% weighting has dropped to the prescribed 1.3% over the past few years…I feel better now.

  3. Robert Easley says:

    The price of gold even with fluctuation you could make a strong case the with instability in world markets that the price will have more upside than other corporate stocks. Would there be a scenario where you would recommend a portfolio with 50% more in gold?

  4. I have been looking to add some physical gold – just a little bit. I haven’t done any research, but is there a place you recommend buying some American Eagles?

  5. So how to buy gold at a fair price without paying a large buy/sell spread?

  6. My gold investment strategy is as “oh crap” insurance — if things go very badly, I’ll have a few coins on hand to restart elsewhere…. assuming the type of “oh crap” that happens still has gold being valuable. It’s far less than 1.3%.

  7. Why Not just buy the SPDR® Gold Shares (GLD) instead of physical gold (if you want to have gold in your porfolio)? Seems a lot easier.

    • I like the idea of holding physical gold in this example because (1) no ongoing management fees and (2) you are less likely to buy and sell and try to time the gold market. Just keep a few physical coins for a poo-hits-the-fan scenario. Part of the reason people buy gold is because they are afraid of confiscation by the government (it’s happened before). If you’re going to buy and rebalance $100,000 of gold, yes it is a lot easier to buy an ETF.

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