So how much gold do you need? This is a good question. To work it out you need to understand how to hedge. Seems a lot of people don’t know. A hedge is something that goes up in value while your assets go down. It’s PROTECTION.
In the aftermath of the 2008 Global Financial Crisis:
- At its worst in 2009, the S&P500 index lost 52% of its value
- It took three years for it to climb back to about break even in July 2011
- Meanwhile gold price went from up 117% from USD 870 to USD 1,895 per ozt
- Refer chart below
So how do you use gold as a hedge?
Assuming the following in an economic collapse:
- Stocks go down 50%
- Gold goes up 100%
If you had USD 1.0 million in stocks, they would be worth USD 0.5 million (ie. down 50%)If you had USD 0.5 million in gold, it would be worth USD 1.0 million) ie. up 100%)The loss in your stocks would be offset by the gain in your goldThis would require you to allocate 33% of your wealth to gold
You can use this as a basis to work out how much gold you need.
- There are some periods of time when gold and stocks move in the same direction. ie. it may look like your hedge is not working
- For example the last two weeks the stock market corrected 20% and the gold price dropped 7.5% because of traders needing to sell gold to raise cash to meet margin calls
- It is better to start the hedge before a crisis. However better late than never
- Do not panic buy (when stocks are going down), and then panic sell (when gold goes down). You need to give time for the hedge to work. There were traders who did this in 2008