It’s hard to identify where some of the classic investment-portfolio-management rules came from.

“Diversify,” is a classic one.

“Younger investors can tolerate more risk,” is another.

“You should allocate only about 10% of your investment portfolio to gold and/or silver.” 

A quick Google search will net you dozens of articles from investment gurus advising to limit your gold/silver exposure to 5-10%. But none of them (that we can find) cite anything more than “good rule of thumb” criteria for making such recommendations.

Indeed, there are also dozens of charts out there that show gold/silver vs. other investments, such as stocks, real estate, or commodities, with the narrative generally being that gold tends to be a nonperforming investment asset. 

Gold doesn’t pay dividends. It tends to move up or down in value in a fairly narrow range. And it has physical storage costs and risks (it can be stolen or lost) that digitally owned stocks or other investments don’t have.

Not only that, but looking back over the past 100 years, U.S. stocks have largely outperformed gold in terms of total ROI (return on investment). In fact, over that period, stocks have more than doubled the return of the price appreciation of gold.

Then 2020 hit. U.S. retail demand for gold as an investment-class asset is up a whopping 92% year to date compared to 2019. And gold’s price has reflected that demand, with gold moving up from a $1,200-per-ounce low in 2018 to reaching over $2,000 per ounce in the beginning of August. 

While gold has given back some of its gains since then (currently trading near $1,900 per ounce), it’s still up 27% on the year, compared to just 5% for stocks. 

But there’s another reason to want more gold in a portfolio. Gold is a hedge against inflation and against unstable (and unsustainable) monetary and fiscal policies.

Part of the reason the 10% allocation limit has been a mantra on Wall Street is that as the dollar weakens, investors have poured money into stocks as a way to offset the devaluation of the dollar. 

But at a certain point, even the most bullish investor wants an alternative to both cash and stocks. Gold fits that bill.

With the Fed’s balance sheet swelling by over 70% YTD, and with Uncle Sam running trillion-dollar deficits, bankers and economists are increasingly warning about dollar weakness against foreign currencies. 

And while consumer price inflation has, so far, remained fairly low, trillions in stimulus do end up entering the retail economy over time, so future inflation is a growing risk.

The net result is that now might be a good time to rethink the “rule of thumb” approach to how much gold a healthy portfolio should carry. Stocks are back near record highs (as is gold), but if the dollar weakens, it could say something about global investor attitudes towards the U.S. economy.

In that case, stocks may not be investors’ natural choice, especially if there are issues around declaring the winner of the upcoming presidential election. Because of that, gold has a good chance of being an investor’s favorite asset… And that could send it to a new all-time high.