CHICAGO (Reuters) – I’ve always had mixed feelings about gold. Is it an alternative currency? A speculator’s refuge from political or fiscal instability? A reliable inflation indicator? Turns out it’s maybe all of the above.
What role should gold play in your portfolio? Certainly it’s no substitute for bonds, which held up well in 2008 and rarely lose money in low-inflation periods. As an inflation hedge, though, you may be better off holding dividend-paying stocks and inflation-protected securities (TIPS). Inflation will return eventually, which means you need to start protecting yourself now from bond-price declines.
Whatever view you take on gold, most financial savants suggest it should occupy no more than 10 percent of your portfolio; and don’t try to time its price movements. And while it can fulfill many roles imperfectly, its appeal changes with the moods of the market’s animal spirits. And here’s why:
For one thing, gold’s worth in a portfolio depends on how it reacts to market sentiment. Does it go up in price when the threat of inflation is imminent or present? According to new research by Eric Weigel of the Leuthold Group in Minneapolis, he’s confirmed that there’s a positive link between gold prices and inflation expectations. That makes sense since higher costs of living and over-printing of money by governments tend to devalue paper currencies.
Yet if you look at the relationship between the dollar’s value and gold, the relationship isn’t quite that clear. When Weigel looked at gold returns and dollar movements over the past dozen years, gold occasionally rose when the dollar declined, showing a “marginally statistically significant” link. That backed the argument that gold behaves as an alternative to dead-tree money, but only since 2010.