Essential Gold Investing

Gold allocations are essential for all investment portfolios.  Every investor needs to have some substantial fraction of their capital deployed in gold.  It combines unique benefits not found together in other assets including great diversification, raw performance, countertrend tendencies, and fat-tail-event insurance.  With investing in gold now as easy as it’s ever been, there’s no excuse not to build up your own material position.

Deciding whether to write a Thanksgiving-weekend essay and what to discuss is challenging.  The great majority of American traders are spending time with their families, either traveling or checked out from markets.  Heading into my own blessed Thanksgiving with family and friends, I wondered if gold would come up in conservations after its fantastic year.  What would people who haven’t invested in it want to know?

Potential investors new to gold probably have little interest for diving into the weeds.  They’re not going to care about gold’s global supply-and-demand fundamentals, or investors’ identifiable capital flows into and out of gold, or speculators’ gold-futures positioning, or gold’s short-term technical situation.  For most I’d bet their primary questions are why should I care about gold investing and what can it do for my wealth?

So I thought I’d hammer out a short primer on gold to share with family and friends new to it.  For a hook, let’s start in the Bible.  Three-thousand years ago one of Israel’s most-famous kings pleased God, so He offered Solomon anything he asked for.  This son of David and Bathsheba requested “a discerning heart to govern your people and to distinguish between right and wrong.”  God was happy with that selfless request.

So He replied “I will give you a wise and discerning heart, so that there will never have been anyone like you, nor will there ever be.”  A little later in that same account, the Bible declares “God gave Solomon wisdom and very great insight, and a breadth of understanding as measureless as the sand on the seashore.”  Solomon went on to pen three books still venerated in the Bible, including Proverbs and Ecclesiastes.

The latter includes one of the most-important verses on money in the entire Bible, which has lots of them.  In Ecclesiastes 11:2, king Solomon overflowing with God’s supernatural wisdom advised “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.”  This principle of portfolio diversification is ancient!  Even God through Solomon warned not to put all your eggs in one basket.

Yet most investors today effectively have a single giant ostrich egg in their portfolio basket, stocks.  They may have some token bonds, and could consider their primary house a real-estate investment.  And while there is some diversification within stocks, those holdings are usually heavily concentrated in the market-dominating mega-cap technology stocks.  Pretty much all investors heavily own the Magnificent Seven.

Today this handful of stocks alone command fully 35.3% of the entire S&P 500’s market capitalization!  So even an index fund has such record exposure.  Solomon advised prudently dividing up investment capital seven or eight ways, which if allocated equally would be 12.5%-to-14.3% portfolio fractions.  Just the Mag7 are double to triple that, and the great majority of American investors have stock exposure over 90%.

This serious lack of diversification is risky for investors’ scarce capital.  Stocks are highly correlated with each other, for the most part they rally and sell off in unison.  And stock markets are forever-cyclical, an endless series of alternating bulls and bears.  So when this hot AI-hype-fueled bull market inevitably rolls over into the next bear, pretty much all stocks are going to follow it lower.  And mega-cap techs amplify losses.

The last S&P 500 bear in 2022 was mild, just a 25.4% loss from early January to mid-October that year.  Yet surrounding that span, the Mag7’s average losses more than doubled that at 54.6%!  These most-popular stocks dominating investors’ portfolios trade at high price-to-earnings ratios compared to broader markets.  So when stocks fall, the mega-cap techs join higher-valuation peers in faring way worse than averages.

Gold’s own bull-bear cycles weren’t favorable then, yet during that exact stock-bear span gold still fared better with a 7.1% loss.  And that was a mere bear cub, kind of cute.  Full-grown bears cut stock markets in half.  From October 2007 to March 2009, the S&P 500 collapsed 56.8% in 17.0 months!  During that exact span, gold surged 24.8% higher!  Gold is not only a great diversifier, but tends to climb when stocks weaken.

The reason is simple.  When stock markets are strong powering higher in bulls, gold is largely forgotten.  Since stocks are working so well, investors feel little need to look elsewhere to prudently diversify.  But once stocks resume grinding lower on balance again, investors remember the wisdom of looking for alternatives to spread their capital among.  Thus gold investment demand tends to surge during stock bears.

A major asset class ideal for diversifying stock-heavy portfolios is awesome, well worth a Solomon-style 1/7th portfolio allocation.  But gold goes beyond that, acting as portfolio insurance in truly-extreme times.  Through history, market outcomes are shaped like bell curves.  But their tails on both sides are fatter than normal distributions.  Markets’ biggest losses and biggest gains occur more often than they should, for fat tails.

The most-recent extreme fat-tail event for investors was the COVID-19-lockdown stock panic in March 2020.  You remember how scary it was not knowing how fast that virus could spread, how lethal it was, or how serious its economic impact could be.  That once-in-a-lifetime uncertainty eviscerated the S&P 500, which plummeted fully 33.9% in just 23 trading days!  Market fear gauges skyrocketed off the charts then.

Gold nicely protected capital during that fat-tail event, merely slumping 3.6% over that exact span.  Gold stabilizes portfolios in extreme times, helping to protect capital.  Investors remember gold’s millennia-old history of weathering every financial crisis when herd fear soars as stocks plunge.  But while gold does thrive in hard times, it certainly doesn’t need them.  Gold can way outperform the S&P 500 during bull cycles.

Today’s mighty AI-hype-fueled stock bull was born in mid-October 2022, when that last bear cub drifted off to hibernation.  From then to late October 2025, the S&P 500 blasted 92.6% higher.  Yet again during that same buy-everything span, gold soared 136.1% offering much-better gains!  Gold can really boost overall portfolio returns, while still acting like a countertrend diversifier offering fat-tail insurance.  It’s all included!

How about a super-long quarter-century span?  Another scary S&P 500 bear market plunged 49.1% over 30.5 months into early October 2002.  So at best in this young millennium, total US stock-market gains over 23 years into last month were 787%.  That’s certainly outstanding, stocks usually make excellent long-term investments.  But over that same span, gold fared much better with 1133% quarter-century gains!

Realize every single one of these S&P 500-gold comparisons come from the stock-market side, they sure aren’t optimized for gold.  If we instead looked at major gold bulls and compared them to the S&P 500 over their exact spans, gold’s outperformance would be much bigger.  Gold has proven one of the 2000s top investments, despite generally remaining quite unpopular until now.  That’s sure evident in portfolio allocations.

In mid-October gold hit its latest all-time-record high of $4,350 after skyrocketing 65.8% year-to-date!  The main way stock investors deploy capital in gold is through three major exchange-traded funds, GLD, IAU, and GLDM.  These physical-gold-bullion-backed ETFs act like conduits for American stock-market capital to slosh into and out of gold.  Their total holdings charted over time approximate gold’s portfolio share.

At gold’s highest close ever, GLD+IAU+GLDM holdings near 1,725 metric tons were worth $241b.  While that’s a big number, the total market capitalization of all 500 S&P 500 stocks that same day ran $62,417b!  That implies American stock investors’ gold allocations were still under 0.4%!  And that was actually high by recent years’ standards, which often ran 0.2%.  That’s far below wise Solomon’s 14.3% allocations at 1/7th.

Investors’ still-super-low gold allocations is the single-most-bullish argument for gold going forward.  No one knows how high those will ultimately go, but even at 1% to 2% the required capital inflows to drive gold there would catapult its price way higher.  For many centuries before modern times, 5%-to-10% gold allocations were universally considered an absolute minimum.  Gold is still seriously under-owned today.

Traditionally investors added gold by buying physical bullion, often national gold coins.  Those include South Africa’s famous Krugerrand and more recently the American Gold Eagle.  You can easily buy these and other sovereign gold coins in any coin store or online.  Physical gold bullion in your own immediate possession is the ultimate financial insurance.  If you tell no one and hide it well, it will be there for any crisis.

Gold is unique because it has great intrinsic value recognized globally.  It isn’t a claim on other assets like stocks, gold is the asset.  Gold won’t crash like stock markets, can’t default like bonds, can’t be frozen like bank accounts, and can easily be sold for cash in any corner of the world.  Buying physical gold bullion has two main problems though, securing that gold and the high commissions inherent in moving it around.

The best high-volume coin dealers without big advertising budgets can buy and sell bullion coins with 2%-to-4% spreads, making for 5%-to-6% commissions for retail investors.  There’s a whole other realm of rare collectible coins called numismatics, and those commissions are far higher.  For newer inexperienced investors, it is way wiser to stay with bullion coins to get the most gold you can for the money deployed.

Over the past couple decades, gold ETFs rose as alternatives to conventional physical investing.  The first real one was the American GLD SPDR Gold Shares born in mid-November 2004.  Soon after the American IAU iShares Gold Trust followed in late January 2005.  Ever since, these behemoths have parlayed their first-mover advantages into remaining the world’s largest and dominant physically-backed gold ETFs.

Exiting last quarter, GLD+IAU held nearly 4/10ths of all the bullion holdings in all the world’s physically-backed gold ETFs!  The rest are fragmented, with third place being a UK one at just 1/16th.  These gold ETFs are designed and actively managed to track gold price moves every day.  So investors can gain gold portfolio exposure by buying their shares.  Trading GLD or IAU is just like buying or selling any other stock.

Adding gold allocations via gold-ETF shares is incredibly-efficient and dirt-cheap with no friction.  While coins have other advantages, buying them requires finding dealers, visiting them or waiting for shipping, and the reverse process to later sell.  And investors have to pay those hefty commissions both ways.  But gold-ETF shares can be traded freely in most stock accounts these days, with zero or trivial commissions.

But unlike gold coins, gold ETFs charge annual percent-of-asset management fees necessary to pay for their services running these ETFs and storing their underlying physical gold bullion.  Those are 0.4% per year for GLD, and 0.25% annually for IAU.  But even with the former, it actually takes decades before GLD charges the equivalent of one round-trip coin trade!  And a new upstart American gold ETF is even better.

GLDM SPDR Gold MiniShares are run by the same management as GLD, this industry’s gold standard.  Where GLD shares originally represented 1/10th of an ounce of gold less those cumulative yearly fees, GLDM was born way later in late June 2018 at just 1/50th.  GLDM’s mission was to make gold cheaper for smaller investors.  In addition to lower share prices, GLDM also only charges a best-in-breed 0.1% annual fee!

So if you are an American stock investor new to gold investing and want to start building an allocation, acquiring GLDM shares through your stock account is the way to do it.  This is the easiest and most-efficient avenue by far to add essential gold portfolio exposure.  Buy shares over time as you have surplus capital available to deploy, and you’ll gradually build a gold allocation and wisely diversify your stock portfolio.

You could also actively trim some of your riskiest general-stock holdings and redeploy that capital in GLDM right away to quickly build a Solomon-level 1/7th allocation.  Gold being super-high argues against deploying all at once, but stock markets also being super-high makes it look more prudent.  However you undertake it, adding a gold allocation should really improve your overall portfolio safety and returns going forward.

Circling back to our ancient exceedingly-wise king, diversifying doesn’t mean only holding 1/7th in stocks.  Maybe you limit Mag7 exposure to 1/7th, and invest other 1/7ths in non-mega-cap-tech stock-market sectors.  While 1/7th should absolutely be in gold, maybe other 1/7ths could include real estate, bonds, bitcoin, silver, or gold miners’ stocks.  Prudent portfolio diversification is a guiding principle, not a prescription.

While we’re on gold, that same Bible account declared “The weight of the gold that Solomon received yearly was 666 talents”.  Biblical scholars translating talents into modern weights coalesce around 75 pounds.  Gold is measured in troy ounces, near 14.6 per pound.  That means king Solomon’s annual gold income alone was around an epic 729k ounces, worth $3.0b at November’s $4,050!  Nice work if you can get it.

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The bottom line is all investors need to have sizable gold allocations.  Gold offers a unique combination of excellent diversification, countertrend-to-stock-markets tendencies, sometimes-fantastic raw performance, and the best fat-tail-event insurance.  Portfolios including Biblical-level gold allocations around 1/7th offer more safety and potential gains than pure-stock ones.  And building gold positions is as easy as it’s ever been.

While buying traditional bullion coins offers some advantages, physically-backed gold-ETF shares have become far more popular in recent decades.  They are virtually free to trade in any stock account, while charging tiny annual management fees far under coins’ hefty two-way commissions.  GLDM is the best-of-breed, run by the leading gold-ETF managers and charging an extraordinarily-cheap 0.1%-of-assets per year.

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