Gold, and probably silver more so, is in a mania. Perhaps this is an obvious observation at this point but yesterday as I heard what seemed like segment after segment on CNBC about the best way to buy gold it just clicked; mania.
Part of the equation is the Fed’s having stimulated speculation in many asset classes. All commodities have been very popular for the last few years so it makes sense that in an environment where speculation is being rewarded that commodities would participate. Another part of this equation is some level of concern being exhibited about what inflation may do shortly (or may be doing already, depending on your thought process).
I’ve read several commentaries from people who are not gold perma bulls making the case for some sort of big leg up in price over a short period of time. We own gold across the board for its diversification benefits and I have often said that if gold is the best performer you own then chances are stocks are struggling. That is true the vast majority of the time but not in the last couple of years.
If prices are starting to blow off up to some level then predicting how long it lasts and to what level prices could go is well beyond what I can do but I think it makes sense to think about proportion.
If the price of gold implodes how much damage would that do to your portfolio and is whatever number you come up with acceptable? This is easy to quantify if your only exposure is something like PDR Gold Trust (GLD) which we own for clients. Should the price cut in half you know exactly how much of a hit your portfolio would take. It would be more difficult to quantify if your exposure includes gold mining stocks or ETFs but if your total exposure is 15% of your portfolio and the price cuts in half then you’re looking at maybe a 7-8% hit to the portfolio. Only you know if that is acceptable.
It makes sense to try to quantify what a large decline would do, whether you could tolerate and from there figure out what action to take. Action could include stop orders (these are not infallible), selling some now, pre-planning some sort of exit strategy (partial or otherwise) and of course you could decide to do nothing.
A few percent in the metal and a couple of more percent in a mining stock and your portfolio will not blow up should gold implode. A modest weighting like this could be enough to cause a drag but I think that goes with the territory every so often.