Main Street: At Least 5% of Your Assets Need to be In This

Source: Main Street

By: Ellen Chang

Investors should be purchasing hard assets such as gold and silver to diversify their portfolios, several industry analysts said.

Gold prices surged last week after the Federal Open Market Committee chose to continue to purchase bonds at $85 billion each month.

This move surprised the financial markets, which had counted on a small adjustment to the past five years of a lax monetary policy. The FOMC could chose to limit the number of bonds it buys back in late October. Tapering the Fed's quantitative easing program would result in interest rates rising.

Before the Fed announced its decision, gold was trading around $1,300 per ounce and quickly spiked by $75 after the news.

Gold prices have stabilized and were trading around $1,329 on Monday, said Jon Najarian, senior economic analyst for Capital Gold Group, based in Chicago.

"I think this was a healthy response," he said. "The initial response was good, but there was a bit of an overreaction like bonds," he said.

Over the next two months, gold will reach $1,400 per ounce once or twice, Najarian said.

Investors should take advantage of being able to purchase gold at its current prices, because it will "prove to be a profitable entry," he said.

"Being able to buy gold under $1,300 is a good entry point for investors," Najarian said.

For consumers who already have gold in their portfolio, they should reassess their allocation every quarter, he said. Investors with a smaller portfolio should have at least 5% of their assets in gold and those with a larger amount in their portfolio should maintain 10%.

"Markets are driven by supply and demand," Najarian said. "Gold is really a limited supply and in a real market that is not manipulated as much as stocks and bonds are by the Fed."

The Fed is not likely to cut back on quantitative easing at its October meeting and could push gold prices higher. he added.

A lax monetary policy will provide a positive outcome for hard assets such as gold and silver, said Scott Carter, CEO of Scott Lear Capital, a Los Angeles precious metals firm that sells physical gold, silver and palladium to retail investors.

"The economy and the stock market are so dependent on the Fed continuing to print money," he said. "The Fed had a tough decision to make. Even the whisper of cutting down the liquidity created a panic in the bond market and a little panic in the stock market."

It is likely that the Fed will continue a liquidity plan through 2014, Carter predicts. This policy is why gold and silver have performed well during the past four to five years and will continue to see the same uptick during the next four years.

During the next 12 to 18 months, gold will reach $ $2,000 to $2,200 per ounce, a sign that the U.S. dollar is weakening and similar to other analyst predictions, he said. Hard assets such as gold, oil or real estate tend to perform well when the government is devaluing its currency.

"Gold is going to continue to grow because there is a strong appetite for it," he said. "There is always a place in a portfolio for diversification. Gold is a great contra asset compared to equities."

Since less than 2% of investors own gold and silver, most people are not properly diversified, Carter said.

"Now is the time to add gold and silver based on what we are facing here in the U.S.," he said.

"The buying power of Americans will be diminished over the next four to five years," Carter said. "As investors, we're addicted to this liquidity. We're having a 'Fed- induced' economic growth."