Diversification and Discipline Are Key to Investing in Gold by Frank Holmes

Like training for a marathon, investing in gold isn’t for the apathetic or indifferent. It requires strong-willed discipline.

gold investorComing into 2014, gold was in a depressed state. The metal had lost over 28 percent the previous year, its greatest slide since 1980. Investors who dropped out of the race in January no doubt regretted the decision in March after watching the metal unexpectedly soar to above $1,300 an ounce.

And the news didn’t stop there. By midyear, gold was one of the top-performing commodities; last month, India, the world’s second-largest consumer of gold, increased its bullion imports by 65 percent; gold mining stocks are currently outpacing the commodity itself.

When prices plunge as dramatically as they did in 2013 and early 2014, it’s easy—instinctive, almost—for our so-called reptilian brains to hijack our better judgment. Our primordial fight-or-flight response kicks in, and too often we choose to fly, only to regret our decision later.

But we’re stronger than that. Jacqueline Gareau, the 1980 Boston Marathon winner, said of long-distance running: “The body does not want you to do this. As you run, it tells you to stop, but the mind must be strong. You always go too far for your body. You must handle the pain with strategy. It is not age. It is not diet. It is the will to succeed.”

Earlier in the year I spoke with Business Television’s Taylor Theon about this very idea that to invest in gold requires not only discipline but also diversification. As I’ve often stressed, we at U.S. Global Investors recommend that 10 percent of your portfolio should be allocated to gold—5 percent to bullion, 5 percent to mining stocks, and rebalance every year. This should always be the case, whether gold is soaring at a good clip or whether its wings appear to have been clipped.

As I advised Theon’s viewers:

“Be diversified. Just appreciate the seasonality and volatility of all these different asset classes. The DNA of gold over any rolling 12 months is plus or minus 15 percent; gold stocks, plus or minus 35 percent. So any time gold stocks fall 35 percent, it’s become an opportunity to buy. When they fall 60 and 70 percent, it’s a screaming buy. And they will rally, and they will rise.”

And rise they did, just as the theory of mean reversion predicted. Mean reversion, which I discuss at length in Part II of my three-part series on managing expectations, states that security prices will revert to their historic average eventually, whether we’re in a bull or bear market.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The J.P. Morgan Global Purchasing Manager’s Index is an indicator of the economic health of the global manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.