What it means
The term dates back to the nineteenth century debates over whether currencies should be backed by gold. It has since come to describe anyone who believes gold deserves a major place in a portfolio or in the monetary system.
Goldbugs tend to distrust central banks and fear that governments will print too much money. Their arguments are easy to understand.
Gold is scarce, has been valued for thousands of years, and cannot be created by a government at will. When inflation is high or confidence in currencies is low, the price of gold often rises, which supports the case.
Critics make equally clear points. Gold produces no income, unlike shares that pay dividends or bonds that pay interest, and holding it involves storage and insurance costs.
Its price can also swing sharply and stay flat for years, so it does not always protect against inflation in the short term. Goldbugs invest in several ways: physical coins and bars, exchange-traded funds that track the metal, and shares in mining companies.
Each has different risks, with mining shares being affected by costs, debt and management as well as the gold price, and with physical metal carrying storage and insurance costs. A sensible investor looks at how each fits the overall portfolio.
A balanced view is that gold can be a useful diversifier, because it often behaves differently from shares and bonds, but is rarely a complete strategy. Most advisers who support holding gold suggest a modest share of the portfolio.
This is a description of an attitude and is not advice to buy or sell. The idea matters outside investing as well.
Goldbug arguments feed into public debates about central bank policy, government deficits and whether currencies should be tied to a physical asset. Even people who disagree with the conclusion often find the questions useful, since they force a closer look at how money gets its value.
In practice
Real-world examples.
Example
A private investor worried about inflation puts 10% of her $500,000 savings into gold funds. She accepts that the holding pays no income, and treats it as insurance against a fall in the value of her cash.
Example
A family office adds a small allocation to gold mining shares and physical bullion to diversify away from shares and bonds. The investment committee sets a limit of 8% and reviews it each year.
Example
A financial journalist describes a fund manager as a goldbug because he has publicly warned about government debt and holds mostly gold-related assets. Other analysts question whether this concentration is wise. His fund's returns lag the market for three years, and the investment committee asks him to explain how the strategy will perform in a period of low inflation.
Formula
Calculation
Gold allocation % = Value of gold holdings / Total portfolio value x 100
An investor has a portfolio worth $400,000, of which $60,000 is in gold funds and bars. The allocation is $60,000 / $400,000 = 0.15, or 15%. If gold rises 20% and everything else stays the same, the gold holding becomes $72,000 and the portfolio becomes $412,000, so the new allocation is $72,000 / $412,000 = 17.5% (to one decimal place).Case study
Seen in the real world.
Redstone Capital is an illustrative, fictional fund led by a self-described goldbug who believed that high government debt would eventually weaken currencies. He put 40% of the fund's $50,000,000 in gold and mining shares, which was $20,000,000.
For several years the price of gold moved sideways while shares rose steadily, and investors complained that the fund was lagging. The fund's finance team reminded the manager that gold paid no income while the fund still had costs of $400,000 a year to cover.
Later, a period of market stress pushed gold up and the fund recovered some of its lost ground. The illustrative lesson is that a strong conviction can protect a portfolio in some conditions, and it can also be costly when the market takes a different path.
Watch out
Common mistakes.
- Assuming gold always rises when inflation rises, when its price can stay flat for years.
- Overlooking storage, insurance and fund costs, which reduce the return from holding gold.
- Putting most of a portfolio into one asset, which removes the benefit of diversification.
Questions
People also ask.
Does gold pay income?
No, gold does not pay interest or dividends, so any return comes from changes in its price, which means it can be a drag on a portfolio when prices are flat.
How can an investor hold gold?
Through physical coins and bars, funds that track the gold price, or shares in mining companies, each with different costs and risks.
Is a goldbug the same as a gold standard supporter?
They overlap, but a goldbug may simply like gold as an investment, while a gold standard supporter wants currencies backed by gold.
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