Gold ownership is a highly individual preference. How much gold you aim to own gold will depend on the following factors:
- Current financial situation
- Investable assets
- Beliefs about gold and the economy
- Risk tolerance
Current financial situation and investable assets
You will need to consider your individual situation in terms of income, debt levels, financial commitments, and your financial goals. This will enable you to determine how much you have available to invest. You then need to consider what proportion of your investable amount you want to assign to gold. This will depend on your beliefs and risk tolerance.
Beliefs about gold and the economy
If you believe that the fiat system will remain strong and that the economy and financil system will steam ahead as it has done in past decades, then having minimal or no gold would match your beliefs. Alternative beliefs form a spectrum. On one end of the spectrum is the expectation of high inflation which may subsequently be controlled as occurred in 1980. The other end of the spectrum expects total collapse of fiat currencies and the financial system. The proportion of gold you hold should partly be based on where you are on that spectrum.
Another important consideration is your risk tolerance. There are risks associated with holding any asset and that does include cash and gold. It is up to you to assess what those risks are and how such risks relate to your individual situation to help you make an informed decision.
Knowing what other people, particularly smart people, are doing might be helpful. The problem is that finding data regarding private gold ownership is very difficult to come by. The reason for this is that one of the desirable properties of gold is privacy.
Let’s start by looking at how much above ground gold exists. There is over 197 thousand tons of above ground gold and if we were to lump all of that gold together to form a cube then it would be 21.7 meters high. Of that, a whopping 47% is in jewelry form, 21% is in private investments, and 17% is owned by central banks. What if we were to divide all the gold equally amongst the whole population? That would give us 0.81 ounces of gold per person. If we just divided the private investment gold then that would only give 0.18 ounces of gold per person, and if we added jewelry to that private investment then that would bring it up to just over half an ounce of gold per person. By this metric, if you own more than one ounce of gold you are actually doing quite well. However this isn’t a very realistic metric because just like fiat currencies, gold will never be evenly distributed.
Central bank gold ownership
Central bank ownership of gold may help guide us. The chart above shows that from 1845 up until around 1970, central banks were steadily accumulating gold but gold buying dropped off quite sharply in the late 1960s and continued to drop well into the full fiat era.
For a long time, central banks have been net sellers of gold but as the chart above shows, that seemed to change in around 2010 when they became net buyers. Remember that this has mainly been driven by central banks in the east and middle east. As far as we know, most western central banks are not buying gold.
Perhaps central banks are are not buying gold because they think that they already have enough? The table above shows the official gold holdings expressed in tons and as a percentage of reserve assets for different countries. Reserve assets can include gold but also include assets such as currencies and special drawing rights (SDRs). USA holds 75% of its reserve assets in gold whereas China holds only 2.4 % of it’s reserve assets in gold. This all seems a bit odd to me but then I think it’s kind of like when someone says that they have $100,000 of gold but then they don’t mention that they have $5.2 million in bad debts on their books.
Global financial asset allocation
What about gold allocation in terms of investment portfolios? The chart above shows how portfolio composition has changed over time. Debt in its multiple forms has ballooned both in terms of absolute amount as well as proportion of portfolios and debt now makes up a substantial proportion. Equities have also increased in proportion over time. Note that gold is barely visible on this chart. Gold is represented by those yellow tips at the top of each bar.
In the last 30 years gold has only accounted for less than 1% of all financial assets. Indeed, the chart above shows that for most of that time gold actually accounted for less than 0.5% of global financial assets. Interestingly in 1960 gold asset allocation was as high as 5%. Notably, financial assets account for trillions of dollars and so even just doubling from 0.5% to 1% in gold would exert significant upwards pressure on the price of gold. The fact that gold is part of global financial asset portfolios suggests that as an absolute minimum, having one percent of your investments in gold would be prudent.
Global asset allocation to silver
The silver market is an even smaller market. In 2004, silver made up only 0.04% of global assets. That’s really really tiny.
Remember that the allocations for gold and silver that I have discussed here are based on full belief in debt and equities and the fiat system. Changes in these beliefs by mainstream investors would likely lead to increases in allocations to precious metals.