SUMMARY: Every type of investment has its pros and cons and gold is no exception. Here’s what you need to consider when thinking about adding gold to your portfolio.
We’re all on the lookout for an investment that can withstand the market’s ups and downs and provide a generous return. Is gold, that foundational precious metal that at one time formed the backbone of the world economy, a viable contender?
Some say that gold is nothing more than an artifact of a time gone by with no useful purpose other than as jewelry. Others stand by it as an essential part of an investor’s toolkit.
What good is gold today?
The majority of the world’s gold is used in jewelry, approximately 40 percent of it is held in various forms of currency (coins, bars, medals, bullion) and the rest is used for industrial purposes (including the microchips in your electronics and the fillings in your teeth).
Even though gold doesn’t officially back any world currency, it still adds significant value to the global economy. Financial institutions such as central banks and the International Monetary Fund together hold almost one-fifth of all above-ground gold. And gold continues to play a role in the current global economic state of uncertainty, with banks buying it at the highest rate in nearly half a century.
So why would the casual investor consider gold?
It does its own thing
Over the past decade, gold’s correlation has been 0.04 with the stock market and 0.25 with the bond market, both very low. In other words, when stocks or bonds go south, gold stands a decent chance of remaining level or even going in the other direction. Put another way, in the middle of the Great Recession (Nov. 30, 2007 to June 1, 2009), as the the S&P 500 Index dipped 36 percent, gold went up 25 percent.
A little bit of gold in your portfolio could lend a hint of stability when one market or another begins to wobble.
It hedges against inflation
When the value of the dollar falls and inflation rises, gold has historically been a hedge against those trends. Gold usually appreciates when inflation rises, making it an appealing hard asset for when investors see their dollars losing value. Although you can stash bars or coins under your bed, many investors go with a mutual fund or exchange-traded fund (ETF) that features gold.
It can be a safe haven
As the world’s political and economic systems continue to be tested by international crises, there is always a concern in the back of our collective minds that currencies may become unstable and even collapse. In these instances, investors may turn to gold to protect wealth and, if necessary, get out of dangerous situations.
But how does it perform?
Even though gold often tracks independently of stocks and bonds and was stable during the Great Recession, it does have its own volatility and the price can jump up and down in a short period of time. In the 10 years leading up to January of 2018, gold underperformed against the S&P 500—the S&P GSCI index produced 3.27 percent as opposed to the S&P 500’s 10.36 percent.
Industry experts recommend thinking about gold as insurance against market sell-offs, with no more than 5 to 10 percent in your portfolio. At that level, dips in gold won’t have a huge impact on long-term returns but will provide enough of a cushion to push back against volatility.
Good advice is worth its weight in ...
Every type of investment has its pros and cons and gold is no exception. Don’t want bars, bullion or a selection of jewelry around the house? Consider shares in a mining company. Want to leverage rising prices? Look to the futures market. Putting some resources into it can provide yet another tool to move you further along the path toward your financial goals.
Whether your journey takes you along the yellow brick road or not, a wealth advisor from TDECU can help sort through less common investment opportunities such as gold. Our wealth advisor checklist can shed some light on what’s right for you.