Last week, I wrote a somewhat critical review of an article by Richard Russell.  For today’s post, I am going to comment on what Russell said near the beginning of his article on selling your gold.

In his piece, Russell wrote this:

“Let’s be honest.  What would we do with our gold if it rallied to 1800 — and then above 2,000?  Actually, I wouldn’t do anything with my physical gold, any more than I’d do something with my house if the real estate market got hot and my house was suddenly worth more.

“What would I sell my gold for?  Sell it for dollars, for euros, or for renminbi?  Or trade it for a Ferrari? No thanks, if you have physical gold, don’t touch it, sit on it, and save it for a rainy day.  When the economy starts raining, and the dollar collapses, you’ll be glad you have something of value.  ‘Patience, patience’ is the right stance.”

Russell is saying not to sell your gold.  I’m not sure if this means forever or if he just means in what he sees as the next big run-up.

I know there are a lot of hard money people out there who would have similar sentiments.  There are even some who think you should have nearly all of your investments in gold or some kind of precious metal.

I do not agree with this strategy.  I understand that a lot of hard money guys and even some libertarians believe that gold is the one true money.  While they might be correct if we lived in a world with a free market, that is simply not the reality.  If you live in the U.S., then the American dollar is your money, whether you like it or not.  Gold certainly has the great characteristics that money should have and it has a great history of being used as money, but that is not the current state of our society.

If you doubt what I say, go to your nearest gas station or grocery store and try paying in gold.  I can just imagine someone going through the checkout line at a Walmart and handing the cashier gold or silver coins to pay.  They would be calling their manager rather quickly.

So the problem here is that you buy stuff with dollars (or whatever fiat currency you use if you live in another country).  You don’t buy things with gold.  You have to convert your gold into dollars and then buy your gas, groceries, etc.  And while the price of gold (in terms of dollars) has gone up over the last 12 years, there is no guarantee that it will continue to do so.  And even if it does trend up, there will be swings in the price.  Much of these swings are due to the instability of the dollar, but regardless, prices vary from day to day.

While I agree with Russell that I think the gold price will likely go higher over the next several years, I am not against taking some “dollar profits” along the way.  Just as bubbles happen in stocks or real estate, the same thing can happen with your gold holdings, whether it is physical gold, ETFs, certificates, or stocks.  If you never sell your gold, then you will never make any dollar profits (which you use to buy things).  And you will never sell near the top and instead will be stuck with the option of selling after the bubble has already burst.

Think about the 1970’s and early 1980’s.  Gold went on a huge run and was briefly above $800 per ounce.  But it quickly took a nose dive and settled around $300 per ounce.  It was no higher about 20 years later.

This was a time when there was a gold bubble.  The price had risen substantially and much of it was due to legitimate concerns.  But for people who had a substantial piece of their net worth in gold investments in 1980, it was the ones who sold at least some of their holdings, prior to the collapse in price, who made out well.

I don’t think we are in a gold bubble yet, but I do think it will happen again.  Once the mania hits, you can find every reason in the world why it will keep on going up.  That is why it is good to think through it in your head now.  You should be disciplined and realize that gold won’t go up in a straight line.  It also won’t go up forever, unless there is hyperinflation.  So if you think as I do that there won’t be hyperinflation, then you should sell small amounts of your gold investments as the price rises.

This is not an all-or-nothing deal.  Let’s say you have a net worth of $100,000 and you have $20,000 in gold and gold related investments.  If the price of gold doubles while the rest of your investments stay the same, then your percentage of gold investments will have gone from 20% to 33%.  So at that point, why not take a little off the table?  Sell off $10,000 in gold investments and spread around the “profit” to your other investments, including cash equivalents.

In conclusion, I don’t think you should never sell your gold.  I also don’t think you should ever sell all of your gold, unless you are starving.  Investing shouldn’t be an all-or-nothing scenario.  If we enter into a gold bubble as I believe we will, then it will be a good idea to sell a small percentage of your gold investments as the price continues up.  If you don’t think you own enough now, then don’t wait.  I recommend a minimum of 20% in your portfolio.