Thursday, 18 February 2010

Gold Within My Retirement Investing Strategy – February 2010 Update

Within my Retirement Investing Strategy I currently hold 3.2% (up from 3.1% at the last gold update due to a buy decision made this month) of my portfolio in gold with a targeted holding of 5%. Gold is the only portion of my portfolio that does not provide a yield (dividends, interest etc).

The first chart shows the updated real price of gold since 1968, with the wild ride that comes with gold obvious. This month the real (after inflation) price of gold has risen by about 0.3% to $1,119.40 per ounce. The trend line however suggests a price today of $631.00 which is the same as the last update. The historical average real gold price from 1968 also remains at $600.52. So by both of these measures gold still appears overpriced.

The correlation between the real S&P 500 (also displayed on the first chart) and real gold also holds from the last update at -0.33. The second chart provides the ratio of the S&P 500 to gold demonstrating just how far apart the two can vary. Today this ratio has lowered slightly from 1.01 to 0.96. The trend line however suggests a ratio today of 2.63 and the historical average ratio from 1968 to today is 1.63. So this measure would suggest that if you were looking to choose to buy the S&P 500 or gold then the S&P 500 might be the better option.
The final point to make however is that while both the first and second charts suggest gold is overpriced on historic measures I cannot forget that in 1980 gold reached an average real monthly price of $1,728 which is a long way above where we are today.

My investment methods are largely mechanical and given that I am underweight gold against my desired low charge portfolio I should be buying more. Unfortunately all my earnings are made in GBP and in this currency gold is starting to feel expensive. Of course I would never make a decision based on feel so I’m going to do some historic real gold price analysis priced in GBP before making the decision to buy more. Of course I’ll share this analysis with you over the next few days.

As always DYOR.

Assumptions include:
- Last Gold price actual taken on the 16 February 2010
- Last S&P 500 price actual taken on the 12 February 2010.
- All other prices are month averages.
- Inflation data from the Bureau of Labor Statistics. January and February ‘10 inflation is extrapolated.

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