How much Gold to own? (Allocation Strategy)

[Van]

OK, help me out here.

 

HOW MUCH GOLD should the "cautious" goldbug own to protect against financial collapse?

 

Genuine question, no-one seems to have a good answer beyond "10% of net worth".

 

Income: £30k

Mortgage: £80k

Housing equity: £30k

Other assets (cash in pension fund): £15k

other debts: none

 

(these are just representative numbers).

 

Cashflow is good, able to save 20% of current monthly income, but mortgage overpayment has been the priority for the last 2 years. Now that is less of a concern (I am about to fix for 5 years) and I am ready to accumulate physical gold, at what I consider to be an great window of opportunity.

 

So the question is how much gold exposure should I aim for?

And is it even worth taking out a short term loan to buy a chunk of gold right now, or will spreadbet exposure be OK while I accumulate physical?

[notanewmember]

I'd say enough to cover 6 months salary or even 12 months. If you were to lose your job, you have this to fall back on.

 

Just in case you jump to leverage - Spread bets just don't seem to ever work out for me - has anyone profitably traded with them?

[drbubb]

A RIGID ALLOCATION TO GOLD, may not be a good idea

==================

 

At current Gold prices, 10-15% (of total wealth) might be a good figure.

 

And if the Gold price rises, and you think Gold looks "toppy", you can sell back down to 10%

 

I also think you might consider going above 10%* after you have paid off your mortgage.

 

(I am significantly above that Percentage at the present time, and have been shifting paper Gold to Physical,

while adding additional physical.)

=== ===

 

SUPPOSE : If are willing to Hold, say 25% of your Total Wealth in Gold and/or Oil (the G/O strategy)

then you might do better by shifting between them, depending on the relative prices, and the G/O Ratio:

 

The Model works off the Gold-to-Oil Ratio to GUIDE YOUR ALLOCATION :

 

 

If you consider over this long time frame:

+ Peak is near 30 bbls /oz.

+ Low is near 7 bbls /oz.,

=====

+ Mid-point is near: 18 bbls.

 

You might consider ALLOCATIONS of your Total Commodity-related exposure using this schedule:

 

Bbl/Oz: -Gold- / --Oil--

: 30 : : 00% G / 100%O

: 25 : : 20% G / 80% O

: 20 : : 40% G / 60% O

: 18 : : 50% G / 50% O

: 16 : : 60% G / 40% O

: 14 : : 67% G / 33% O

: 12 : : 75% G / 25% O

: 10 : : 82% G / 18% O

: 08 : : 90% G / 10% O

: 07 : : 100%G / 00% O

 

So how would this work in practice?

 

 

Notes:

+ When Gold shot up in 2011 from 13 to over 22 bbls per ounce, you would have been selling gold and buying Oil

+ As Gold fell back down to under 12 bbls, you could take profits on Oil holdings, and shift back into gold.

+ If you are not able to take a profit when you do the shift, you can just retain the existing holdings, and await a better opportunity

 

As a concrete example, let's look at someone starting with a Net Worth of $200,000,

who is happy to keep 25% of his/her wealth ($50,000) in Gold and Oil related investments.

The percentage allocations I am using are based on the Model that I outlined above.

 

(Initiate)

In April 2011, I assume he had $50,000 - invested as follows: (at 4/01/11, with a G/O Ratio:13 ):

 

+ Gold : ideal 71% ($35,500), Actual 71% : $35,500 / $139.20-GLD = 255.0 shs

+ Oil--- : ideal 29% ($14,500), Actual 29% : $15,500 / $ 79.99- XLE = 193.8 shs (WTI-???)

================================= :: $50,000

 

Now I assume a patient and timely investor, who waits out the move in Gold, and makes his next reallocation, when Gold is near its high, over $1850.

 

(Shift #1)

After the Ratio shot up to R-22 in early Sept. 2011, the situation became: (9/02/11, with GO R:22+)

+ Gold : ideal 30% ($17,867), Actual 78.5% : $46,724 / $183.24-GLD x 255.0 shs -157.5 shs

+ Oil--- : ideal 70% ($41,689), Actual 21.5% : $12,833 / $ 66.22-XLE x 193.8 shs +435.8 shs

=================================== : $59,557 : x48.5%: $28,857 / $183.24 / 157.5

 

So the 30%/70% Allocation model suggested shifting about $29,000 from Gold into Oil (ie selling 157.5 GLD shs, and buyng 435.8 XLE shs.)

 

/ A side comment: /

If the person's other net worth (outside this allocation strategy) had not increased, and he wanted no more than $50,000 of his wealth held in this form, then they might have taken the whole profit of $9,557, and shifted the funds outside the strategy; perhaps to repay a mortgage. After the reduction, he apply the allocation percentages to the $50,000 left in the Gold/Oil strategy. However, in this example, I have assumed the full amount is left in G/O. /

 

Okay, so I assume the Shift #! was done in Sept. 2011, and the investor has been very patient, and waited until now, to do the second shift,

to the ideal levels for a Ratio of 12, ie back to 75% Gold / 25% Oil.

 

(Shift #2)

The ratio has dropped to R-12 in early July, the model suggests a reallocation as follows: (7/09/13, with the R:12):

 

+ Gold : ideal 75% ($47,174), Actual 18.7% : $11,760 / $120.62-GLD x 97.5 shs + 293.6 shs

+ Oil--- : ideal 25% ($15,724), Actual 81.3% : $51,138 / $ 81.30-XLE x 629.0 shs - 435.6 shs

=================================== : $62,898 : x56.3%: $35,414 / $120.62 = 293.6 shs

 

This shows another gain. This time, it is a $3,342 gain.

And that's despite the big -34.2% fall in Gold. Thanks to because the smaller 30% allocation, the loss on GLD was only -$6,107, and that was more than covered by the +$9,449 gain on XLE.

 

The power of the Allocation model is that it shifts wealth into the lower risk, cheaper commodity. The strategy works well in this example.

 

BTW, if the dollar is weak, and commodities are shooting up, you can "win" on both sides. And if both are dropping, then you probably are seeing deflation, and the spending power of your income and your other wealth is rising.

 

 

===========

*What's XLE doing in the portfolio, instead of WTI Crude?

 

In this example, I have used XLE* (The Oil Service etf) as my proxy for oil.. Here's the Ratio between XLE and WTI over the past three years:

 

 

As an alternative, I might have used OIH, the Oil Service etf. It has not performed as well as XLE over this period.

 

 

In general, OIH has been a reasonable proxy for Oil over the years, much better than USO (the Oil etf**), which seems to have been designed to lose value. But you would not want to own it at all times. It might be better to hold WTI futures, or even cash and await a better time to buy. For instance, at the moment I would prefer to own WTI (at $104.49, rather than OIH at $45.16) since the ratio (43.2%) is now in a falling trend, ie WTI is gaining on OIH.

 

=== ===

**If you do not want to use WTI futures as your preferred way to hold Oil exposures (because of "roll costs", etc), you may prefer to hold various etfs, such as: XLE- Major Oil shares, OIH- Oil Service sector, or USO- Oil etf. I do not recommend USO, since the share also suffers the roll costs of owning futures, and tends to lose value over time.

 

Comparison: OIH versus XLE and USO ... update : 10yrs : 2yrs

 

[Van]

Excellent, DrB. Many thanks.

I do like the strategy of rebalancing your wealth between different assets.

 

Maybe there is a bigger theme we could work on with a rotation model based on inter-asset price ratios..

 

A good idea could be to consider rotating between the following:

 

PMs

Oil

Housing

Equities

Bonds

Cash

[drbubb]

Excellent, DrB. Many thanks.

I do like the strategy of rebalancing your wealth between different assets.

 

Maybe there is a bigger theme we could work on with a rotation model based on inter-asset price ratios..

 

A good idea could be to consider rotating between the following:

 

PMs

Oil

Housing

Equities

Bonds

Cash

 

Part of the key to successful allocation might be:

 

How much of your future income will you spend on each key area?

(Housing is likely to be the biggest single area - so you might want a range of; 20-40% in that)

And:

What do you use to hedge: Food and Clothing ?

 

The best hedge for food might be having a nice kitchen garden, and it can be a very worthwhile investment of money and time.

 

A good think about this strategy should be that you are usually taking profits, and shifting that elsewhere.

This makes good "intuitive sense" to me.

[drbubb]

I have redone the explanation of the G/O Allocation model.

I hope it is clearer now.

[Walktothewater]

OK, help me out here.

How much gold should the "cautious" goldbug own to protect against financial collapse? Genuine question, no-one seems to have a good answer beyond "10% of net worth".

 

I look at this two ways.

 

First, the 'total ounce' view. I want to have a certain quantity of physical for xyz purposes. Say e.g. you want to end up with a min two properties in UK, one to live in and one to rent. If you have zero properties now you'll need 120oz. My research suggests an average UK house will revert to 60oz at some point before the mania top in gold.

 

Second, is the % of assets view. Mine would be considered 'high' for two reasons:

 

One, i consider my base as current assets plus total remaining lifetime net earnings. I believe GF has made this point before. My career is like owning a bond with coupons til I retire, but those are paid out in fiat.

 

Two, forget diversification. As of about 4 years ago my earnings started going exclusively into acquiring cash-flow property (no debt) and precious metals. Month in, month out. I have almost nothing in the stock market bar legacy stuff such as uranium shares etc. I have perhaps 5% in cash at any one time. I also invest heavily in my career and don't hold back owning valuable cashable possessions - vehicles, technical equipment, high end furniture - their lifetime depreciation is way lower than fiat.

 

 

wttw

[drbubb]

A similar "Pairs" choice : GOLD vs. OIL - using shares

 

GDX (Major Gold Miners) versus XLE (Major Oil shares)

 

 

...OR THIS, more "extreme" trade : GDX versus PHM (Pulte Homes) - for Housing / US Homebuilders

 

 

Here's PHM, bellwether for the US Builders ... update : AllData : 3-years

 

 

TURNS : G/H Ratio

=====

? : Date------ : -PHM - : -GDX - : - HUI -- : - GLD -- : Gd/P : Gld/P : Gld/G

H : 07-28-05 : $47.93 : $20.70*: 197.16 : $042.75 : 00.43 : 00.89 : 2.06

L : 01-08-08 : $08.66 : $50.80 : 454.11 : $086.78 : 05.87 : 10.02 : 1.71

H : 09-19-08 : $17.23 : $35.20 : 323.74 : $085.98 : 02.04 : 04.99 : 2.44

L : 10-03-11 : $03.54 : $54.45 : 519.93 : $160.95 : 15.38 : 45.47 : 2.95

H : 05-14-13 : $24.25 : $28.71 : 269.51 : $137.81 : 01.18 : 05.68 : 4.80

L : 06-??-15 : $07.00 : $10.00 : $10.00 : $100.00 : Poss. Time ??

=====

*Estimated GDX, based on HUI x 10.5%

 

Gold versus Builders : They Trade nicely OPPOSITE to each other ... update

 

:

[drbubb]

A Confirmation in favor of Gold shares (against Homebuilders/ PHM)

 

RE-ALLOCATION : Out of Housing, and back into Gold ?

 

You can see that here:

 

 

The down-channel has been broken, and the Ratio is above the (dotted) moving average...

After: the first Higher Low in a long time.

 

HISTORICAL

== : timing--- : $Price : -Change- : -GDX : -PHM :

3 : beg-12/10 : 09.54 : ----------- :

4 : end-05/11 : 06.71 : - 29.66% :

5 : mid-08/11 : 17.24 :+156.93% :

A : mid-05/12 : 03.99 : - 76.86% :

B : end-05/12 : 06.09 : +52.63% :

C : mid-05/13 : 01.10 : - 81.94% :

now 24-07/13 : 01.46 : +32.73% : 26.95 : 18.45 :

 

(There's No housing bubble yet? Really?)

 

Why there’s no housing bubble...yet

 

WASHINGTON (MarketWatch) - As home prices rise, so are concerns that a new housing-market bubble may be appearing, particularly in cities with double-digit annual growth rates.

 

Are there red flags in recent data?

“I wouldn’t say that we have bubbles today. But if prices keep rising at these rates, pretty soon you will be in bubble territory,” said Dean Baker, co-director of the Center for Economic and Policy Research, a Washington think tank. “Generally, you don’t see situations with rapidly rising prices and they just stop.”

 

Before the bubble burst, year-over-year price growth reached above 17%. The current rebound has yet to reach such a frenzied pace, though home prices recently posted year-over-year growth of 12%, the fastest rate since 2006, according to the Case-Shiller index that tracks 20 cities.

Many of the cities with the largest price gains are where housing crashed hardest when the bubble burst. For example, Las Vegas home prices recently posted year-over-year growth of 22%, but (as seen in the chart) remain more than 50% below a 2006 peak, according to the most recent S&P/Case-Shiller report. Prices in both Phoenix and Miami also more than 40% below local peak levels in those cities, despite recent jumps higher.Read about the latest data on home sales.

 

“What’s important to keep in context is that those double-digit gains are off of very low prices. Even with those gains prices are still relatively low,” said Frank Nothaft, chief economist at federally controlled mortgage buyer Freddie Mac.

 

Tight inventory, pent-up demand and investors have supported price gains. Despite those gains, prices are 26% below peak levels, according to Case-Shiller’s 20-city composite index. Take San Francisco, for example, where inventory is lean and competition is fierce between would-be buyers. Among the 20 cities tracked by the Case-Shiller index, San Francisco recently posted the fastest year-over-year growth, hitting just under 24%. Yet even there prices are 26% below peak.

 

 

Looking forward, such large price gains are unsustainable, especially as rising mortgage rates cut affordability and income growth plods along.

===

/more: http://www.marketwat...&dist=bigcharts

[drbubb]

Peter Hug on Gold allocation:

 

MP3 : mms://media.kitco.com/weeklyreport/peter_hug20130722.mp3

 

"If gold doubles in price, lighten up"

 

"If you have 10% of your Net Worth in Gold at $1,000, and it jumps to $1,900,

you need to recalibrate... So if all other investments were the same, you should be selling almost Half."

 

"You should recalibrate every year, or every three months... whatever suits you better."

[electroweak]

Peter Hug on Gold allocation:

 

MP3 : mms://media.kitco.com/weeklyreport/peter_hug20130722.mp3

 

"If gold doubles in price, lighten up"

 

"If you have 10% of your Net Worth in Gold at $1,000, and it jumps to $1,900,

you need to recalibrate... So if all other investments were the same, you should be selling almost Half."

 

"You should recalibrate every year, or every three months... whatever suits you better."

 

Interesting, but I am just recalibrating UP at the moment.

I actually bought some gold on 28th June, at the bottom.

 

I am sure my pension fund (defined beneft scheme, I have no say on investments) will have had some US Munis, incl. Detriot, so i see that as being 'in jeopardy'.

My equity and bond exposure is large enough if i consider my pension.

[drbubb]

Interesting, but I am just recalibrating UP at the moment.

I actually bought some gold on 28th June, at the bottom.

 

Recalibrating UP to whatever Target percentage you want seems like a Good Move at these prices.

 

But what should you be aiming for - that's a question I have been pondering.

Perhaps the best guide, is to USE YOUR SAVINGS TO HEDGE FUTURE EXPENDITURES

 

And what might future expenditures be ?

 

Perhaps the CPI weightings can provide a good guide to that:

 

CPI : Consumer Price Index, for US - Index, charts, etf

 

One of the Fed's Favorite Tools

============================

 

CPI-etf suggests 5 year inflation is under 1% p.a. (which looks too slow) :

CPI-index shows CPI inflation to May'2013 is under 2% p.a.

 

: components : tables :

=====

 

Relative Importance of CPI Components, 2012

 

All Items --------------- 100.0%

Housing -------------- 41.021%

: Owners equiv.rent ----------- : 24.041%

: Rent, primary resid.---------- : 06.545%

: Household energy------------ : 04.099%

Transportation------- 16.846%

: Motor fuel ---------------------- : 05.462%

Food, Beverages-- : 15.261%

Medical care ---------- 7.163%

Education, comms.- : 6.779%

Recreation ------------ 5.990%

Apparel ---------------- 3.564%

Other goods, service 3.376%

=====

/source: http://www.bls.gov/cpi/cpiri2012.pdf

 

If you add together the two main housing items, that's 30.5%,

and Housing minus Household Energy is 37% - so I say keep at least 1/3 of your wealth in Housing.

For most people (especially in the UK and HK where homes are expensive, it is far above that.)

 

Energy (Household energy + Motor fuel) is 9.7%,

But cost of energy is imbedded in other areas to, so I suggest 10-20% of wealth should be in energy investments.

Or, alternatively, you can hedge some of that by purchasing a home near public transport.

 

Food, beverages comes to 15.3%, and that can be partly hedged by having your own garden.

But maybe also by owning Food related shares, or Agricultural commodities.

 

Apparel is 3.5%. Let's call it 5%, and hedge through Retail and Apparel stocks (for example)

 

=========

So adding up what we have so far, it is :

+ Housing-- : 35%

+ Energy--- : 10-20%

+ Food / Ag : 15%

+ Apparel--- : 5%

=========

Sub-Total-- : 65-75%

 

That leaves only 25-35%.

 

Many people might buy that by purchasing a diversified portfolio of blue chip stocks. Yet I wonder if that is always sensible.

 

If you look at the remaining items in detail, the biggest three items are:

 

Medical: 7.1%, Education: 6.8%, Recreation: 6.0%

 

Medical costs and Recreational expense, are probably hedge-able through stocks (to some degree.)

But educational costs are less easy to hedge. In fact, that is a cost typically borne by parents, and one of the unfortunate things that many parents have experienced is that those costs have gone up faster, far faster, than has CPI - and faster than wages too.. Thus this item has been tough to budget and plan.

 

Gold can serve a function in hedging the hard-to-hedge expenses. But it also serves as Overall Insurance policy, for times when the economy may be shattered by war, politics, or economic chaos.