The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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So, What About Gold?

With gold hitting record highs almost daily, it is not surprising I get asked about it almost every time I go out. 

Most financial advisors are comfortable putting 5% to 10% of a client’s portfolio into commodities, of which 1% to 2% would be gold.  I already have a higher allocation than that in most of my portfolios, but I’m not adding to it at these levels.

Gold reached a record $850 an ounce in January of 1980.  Adjusted for inflation and the depreciation of the dollar, that is equivalent to $2,200 an ounce now.  This makes the current price of $1,630 seem cheap, but it is not. 

I’m a long term bull on gold as a long-term investment, not as a speculative investment.  Whenever the basic relationship between gold and the stock of gold mining companies deviate, it is likely to be a short term price move that cannot be sustained.  You have to be a little smart and a lot lucky to get up before it falls, because it falls hard.  Normally, gold sells for 1.05 times the average price of gold miners.  Today, it is 1.49.  The price is artificially high entirely due to fear over the debt ceiling issue.  Once resolved, the fear will fall quickly, and gold will fall even faster.  At these levels, I’m more inclined to sell the gold I hold than to buy any more.