MANKIW: It Makes Sense To Me To Own Some Of Gold In An Investment Portfolio

greg mankiwGreg Mankiw

Harvard economist and former George W. Bush advisor Greg Mankiw has a new piece in the New York Times grappling with whether a smart investor should hold some gold.

Mankiw calls himself a “boring” investor — your standard 60% stocks 40% bonds kind of guy — who never really saw the value in hoarding gold.

But when a friend asked him if he should add gold his portfolio, Mankiw dove into the academic research. He came away with four main points:

  1. There just isn’t a lot of gold (less than one ounce a person if we divided it equally among the global population). And most of it is unavailable to a private investor, as half of gold is in the form of jewelry and another large chunk rests in central bank vaults.
  2. It has a small real return. “Over the long run, gold’s price has outpaced overall prices as measured by the Consumer Price Index — but not by much,” Mankiw writes.
  3. Gold has a highly volatile price. “Because gold is a small asset class with meager returns and high volatility, an investor may be tempted to avoid it altogether,” according to Mankiw.
  4. Gold’s unique identity makes it somewhat attractive for investors. Gold does not correlate with stocks or bonds. “Despite gold’s volatility, adding a little to a standard portfolio can reduce its overall risk,” Mankiw writes.

So how much gold does the Harvard economist think you should have in your portfolio?   “A small sliver, such as the 2 per cent weight in the world market portfolio, now makes sense to me as part of a long-term investment strategy,” he concludes.

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