Once of interest primarily to collectors, jewelers, and people convinced that Armageddon is near, gold is now the investment of every coffee shop and happy hour. The questions for you: Should I buy it now? How do I own it?
Investors have turned to gold in times of high economic uncertainty. The whole of America was in panic over the global financial crisis in late 2008. Gold prices started heading up from around $700 an ounce to around $1,200 an ounce today. U.S. investors poured $15 billion into gold funds in 2009, as they were pulling money out of stock portfolios. SPDR Gold Trust is now the second-largest electronically traded fund in the country after one that tracks the S&P 500.
That’s not exactly surprising. When something goes up a lot quickly, we start asking, “Why am I not in it? And how can I get in it fast?” Recent history reminds us that mentality was widespread with real estate as well. You don’t want to get in at the equivalent of the Internet bubble in 1999 or a Las Vegas condo in 2007.
Inflation is a common reason gold enthusiasts give for why you need it in your portfolio. Increased government spending could lead to higher inflation. But that’s not a sure thing in recessionary times, especially in downturns as bad as this one, when consumer demand for goods and services is still depressed.
One study found gold prices and inflation had very little correlation. Between January 1977 and April 1980, small-company stocks were actually the best-performing asset. Since the end of 1974, when the federal government permitted U.S. households to own gold as an investment for the first time since Depression times; even the S&P 500 index has whipped inflation by a wider margin than gold has.
Gold advocates will argue that you can put more faith in a tangible 27 pound block of metal than in computer data sitting on a Treasury Department server. But remember that the whole “real equals safer” argument was cited as the reason housing prices would never go down and we saw where that went.
Gold is a commodity like other metals and agricultural products and comes with volatility. Careful thought should be given to your investment objectives, time horizon and comfort level with the risks. Many experts discourage more than 5 percent of a portfolio to any one commodity. If you come to the conclusion that you must own gold, consider these options.
Gold coins can be bought through the US Mint at a 33 percent markup. You will want to buy insurance against theft or pay a dealer to store them. For tax purposes, the coins are considered collectibles and do not get capital gains treatment.
Gold mining funds. You can own several companies that harvest the metal, but these investment can be affected by the direction of the general stock market and decisions made by the fund’s managers, not just by the price of gold itself. Taxes on these investments are at the capital gains rates if held outside an IRA or retirement plan.
Gold ETFs can be bought easily through any brokerage account, but you do pay management fees inherit to these investments. The IRS views this as owning gold also.
Remember, buying something because it’s gone up a lot and everyone else is doing it is not a sound investment decision strategy. Consider Treasury Inflation-Protected Securities or TIPS that are guaranteed to keep pace with rising prices as a less volatile alternative than gold if you are only worried about rising inflation.
Kris Flammang, is a co-founder of LPF Financial Advisors with offices in Lakewood Ranch. He is a chartered retirement planning counselor and registered representative with Securities America, Inc. LPF Financial Advisors and SAI are separate entities. He can be reached at (941) 907-0101 or firstname.lastname@example.org.