The Oxford Oracle

How Much Gold Should I Have in my Portfolio?

Investors often flee to U.S. Treasuries and gold during volatile times, which bids the price up.  Gold has been a store of value since ancient times and still draws considerable interest from investors and the media.  Through early August, gold is up 26% for the year and is selling near all-time highs.  The media and TV ads are touting gold as the next great investment.

So, how much gold should be in your portfolio?  

In a word...Zero.  Zilch.  Nada.  

Let's talk about what gold is good for:

  • Making pretty things
  • Collecting dust in the vault
  • Generating sales commissions for brokers who trade gold

Here's what gold does NOT do:

  • Pay dividends
  • Hire employees
  • Build products or services for sale
  • Contribute to the productive economy

And the biggest surprise of all?  Gold hardly even beats inflation in the long run!  We looked at 40 years of data going back to the heyday of gold in 1980, all the way through July 2020.  A $10,000 investment in gold in 1980 would be worth a mere $10,716 today in inflation-adjusted dollars.  Gold returned 3.1% annually before inflation, and only 0.2% after inflation, hardly better than sticking your money under the mattress.  Gold has essentially been dead money for 40 years.  So much for gold as an inflation hedge.

Fortunately there is an investment out there that does belong in your portfolio.  It's the stocks of the 500 great companies in America as measured by the S&P 500.  Powered by the constantly rising dividends and capital values of these companies, a $10,000 investment in 1980 would be worth $245,332 in inflation-adjusted dollars today.  Stocks grew 11.5% annually over the last 40 years before inflation,  and generated real growth of 8.3% annually after inflation.

Conclusion: investing in gold is silly. But selling stocks to buy gold is beyond silly; it's historically insane. By far the greatest long-term inflation hedge ever crafted by the hand of man has been mainstream U.S. stocks.  It's never different this time.

Gold does not innovate, it does not make anything, it does not hire workers. Only well-run companies do that, and the only way to participate in their steady march forward is to continue to invest in them.  Gold makes very pretty jewelry. Just don’t confuse it with an investment strategy.