Based on copious amounts of anecdotal evidence, gold investors tend to be highly sensitive to criticism. The gold bugs would have you believe — and proclaim zealously — that the precious metal must be held in all portfolios to protect against everything wrong in the world… and how dare you say otherwise! There is too much money printing and currency debasement, with massive inflation on the horizon and geopolitical risk on the rise.
Of course, there may be some truth to that, which is why we hold a small gold position in our portfolios. But we prefer to view gold as any other asset, and we have done very well managing the position.
Below is a chart of gold from 9/30/2009 to present. At four different times over the last two years, we changed our position weight in gold. In early 2010, we increased our gold position to 5% in all portfolios. Gold then had a massive rally for the entire year and we decided to take our position down to 3%. Very quickly — in one month — gold worked off excessive optimism, become oversold on momentum indicators and came back to the longer trend. At that point, we felt it was time to add back to our position by increasing it to 4%. Gold proceeded to have an even bigger rally from $1330 to $1800, as optimism surged. We felt this was too far, too fast and the price looked stretched, so we once again reduced our position to 3%.
Treating gold as a tradable asset has served us very well, and we will continue to manage the position in this way. At some point, we may not even own any gold. Blasphemy!