Why You Need Gold in Your Portfolio

 | Aug 22, 2011 | 12:13 PM EDT  | Comments
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The race to debase. That's what's fueling gold right now. The desire of almost every country in the world from Japan to Switzerland, from all of Europe to the U.S., to get their currencies down in order to export their way out of the worldwide economic slowdown.

When everyone believes in a weak currency, you need a strong currency, and the strongest currency is gold.

I have liked gold for years and years, mostly as a hedge to the chaos and a belief that it is way too hated as an asset class. I base that view on the notion that gold represents about 1.55% of the world's portfolios, down from about 5% historically.

That's only one of the reasons to buy, though. We have also seen emerging middle classes around the world purchase gold as a way of passing on wealth or showing wealth, as is the case in the upcoming Indian wedding season. We see wealthier central banks buying gold in order to keep a storehold of assets that can't be debased by governments.

Now we are also seeing a stunning decline in the ability to find more gold as one gold miner after another falters in its attempts to extract gold from the earth with any ease or precision, despite the meteoric rise of the precious metal. You would think these big gains would bring about scads of old gold mines reopening and all sorts of new prospecting, but it just hasn't happened. And outfits such as Agnico-Eagle Mines (AEM) and Goldcorp (GG), once considered among the best executers in the mining business, have faltered badly.

But nothing is more powerful when it comes to raising the price of gold than a Fed chief about to speak at Jackson Hole who can't possibly offer any reassurance of anything but a weak dollar. Whether he does QE3 or pledges just to stay easy, gold can go higher.

Now I tend not to like parabolic moves, one where anything goes straight up as gold has. But I also feel that people still do not own enough gold. I think that it can go higher, but when the exchanges boost margin requirements -- and I said "when," not "if," because the recent hike failed to deter buyers -- you are going to get a hiccup.

Rather than tell you to sell gold if you already have it, what I would prefer is that those who own less than 10% gold as part of their portfolio allocations boost it, through the SPDR Gold Shares (GLD), to above 10%. Those who now have it as more than 20% of their assets because of price appreciation should be trimming right here, but only down to 20%. It is too precious to be anything but overweighted as the ultimate currency for a time when currencies are losing their strength around the globe.

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