If gold isn’t safe, then what is?

Having just given a talk over the weekend to the Real Estate Investment Network (REIN), I agreed with this person that real estate certainly can be considered a haven of sorts, assuming it’s one part of a broadly diversified portfolio of financial assets.

Both gold and real estate are solid tangible items and I’d be comfortable owning each asset class to the tune of 10% or 15% of an investment portfolio, not counting a principal residence. Personally, I prefer ETFs holding REITs but as I mentioned in my talk, I can certainly sympathize with the realtors’ preference for bricks-and-mortar over mere “blips in a computer,” even if it entails the multiple headaches of being a landlord.

The four camps of gold investors

As for gold, I’ve always been in the intermediate position of a 10% weighting, which means I’m feeling a bit battered after Monday’s action. Over the years, the experts and financial advisers I’ve talked to have been in four main camps about gold. Here they are:

Camp 1: Zero exposure. They view gold as a “barbarous relic” that pays no income unless you choose volatile dividend-paying gold stocks.

Camp 2: The 5% “insurance” camp. This camp is similar to Camp 1 but views a 5% position in bullion as “insurance” should economic Armageddon unfold. As with fire or car insurance, this is a policy you hope you never have to collect on.

Camp 3: The 10% camp I inhabit myself, with roughly equal exposure to bullion, including silver and platinum, plus precious metals stocks. This camp views inflation as more or less inevitable, given the fact the world’s central banks continue to put their printing presses into overdrive. Gold, like real estate, can be viewed as a solid inflation hedge. Both asset classes are mentioned in David Aston’s excellent retirement column in the current issue of MoneySense (Slay the Inflation Dragon) on newsstands now.

Camp 4: True believers and gold “bugs.” Those with 15%, 20% or more exposure to gold I’d categorize as the true gold bugs. No doubt this group is chastened by the past week’s action but from the commentary I’ve seen so far, they are nowhere near close to capitulating. True to form, most view the current setback as the proverbial buying opportunity. We’ll see.

What I can say is that if you have zero exposure but think the 5% insurance allocation makes sense, now is a much better time to start building a position than when gold was close to $2,000 an ounce. The same goes for those in the other camps although caution and gradually testing the waters would seem to be the prudent way to go here.

No single asset class is a “safe” haven, not even cash

Whether you swear by gold, real estate, cash, bonds, reverse index funds or even dividend-paying stocks, the lesson of this gold crash is that no one asset class can be considered a safe haven. Treasury bills paying 0.25% interest aren’t safe: not with the money-printing that’s going on. Long bonds aren’t safe havens either, given the danger of capital losses if interest rates get hiked.

Dividend lovers may look fondly at blue chip stocks paying 4 or 5%, which is a vast improvement on GIC rate and bond yields but of course at any moment stock prices could plunge, as they did yesterday, and a generous dividend may pale in comparison to the massive capital loss.

No, Virginia, there is no single asset class out there that can be considered a safe haven. We’re left with those dull platitudes the financial industry constantly reiterates: it’s all about prudent asset allocation and geographical diversification. A big bet on any one asset class, whether it’s long bonds, gold or stocks, is a bet that can quickly turn sour. Just ask the gold bugs.

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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