The year 2020 hasn’t felt like the golden age of anything, except maybe for gold itself. Early August saw the shiny yellow stuff hit an all-time high of more than $2,000 an ounce. Prices have fallen back since then, but it has still been an excellent year for gold investors so far: The price of the metal has risen by 27.5% in 2020, compared with a 21.8% total return for the Nasdaq Composite stock index (.IXIC) and a 4.8% total return for the S&P 500 (.SPX). Even longtime gold detractor Warren Buffett recently purchased stock in a gold mining company. (Prices and returns are through September 11.)
Gold’s glow-up has come even though it produces no earnings or income in the form of dividends, as would a stock. Unlike the case with other commodities, such as copper and tungsten, gold’s prices don’t rise and fall along with industrial demand.
So, why the gold rush? For one thing, basement-low interest rates mean that many bond investors currently earn yields lower than the rate of inflation. In such a climate, gold’s lack of yield is much less of a drawback, says Doug Ramsey, chief investment officer at the Leuthold Group. “Any competition gold had from fixed income has vanished,” he says.
Also contributing to gold’s rise: the Fed’s decision to flood the U.S. economy with unprecedented amounts of stimulus money in the wake of the COVID-19 pandemic. Gold is a classic inflation hedge, and investors have snapped up the metal on the premise that the stimulus will eventually drive up prices if the influx of cash causes consumer demand to rise faster than the supply of goods and services.
And because gold has been considered a currency for millennia, investors may believe they can find a “store of value” in the metal when they lose faith in paper currency, says Brian Andrew, chief investment officer at investment firm Johnson Financial. The U.S. dollar has fallen 8% against a basket of other currencies since March due to the Fed’s drastic monetary policies, among other factors, and some market watchers are beginning to question the currency’s preeminent status on the world stage. “Real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge,” wrote Goldman Sachs analysts in a recent note.
Finally, investors tend to flock to gold amid periods of uncertainty—in financial markets and in the world at large, says Andrew. To find more than enough uncertainty, consider the geopolitics of the Brexit transition and the U.S. presidential election, as well as the ongoing pandemic and its impact on the global economy.
Mixed track record. But gold has a spotty history when it comes to fulfilling investor expectations. Its record as a hedge against inflation, for instance, is only so-so. In successive 12-month periods from December 1973 through May 2020, gold outpaced the rise in consumer prices only 51% of the time.
And although the metal has proven its mettle in some market downturns, there’s no guarantee that gold will protect your portfolio when markets go bad. In the summer of 2011, when the S&P 500 slid 19% between April and October, gold hit a record high. But when stock returns struggled to crack 1% in 2015, gold prices fell 11%. Had you bought gold at its previous peak, in 2011, you’d have had to wait until July of this year to break even.
Nevertheless, investors looking to diversify their portfolios—a proven strategy to smooth returns over time—should add some of the shiny stuff, says Ramsey. He says investors should hold 2% to 5% of their portfolio in gold as a portfolio diversifier. Moreover, he believes that concerns that the Fed is devaluing the dollar by pumping unprecedented amounts of cash into the economy are justified.
How to buy. There’s more than one way to own gold, and the way you go about buying it should depend on why you’re investing, says Andrew. If, for whatever reason, you’re worried that the money in your wallet may become severely devalued, you’ll want physical gold, he says. The U.S. Mint doesn’t sell bullion coins directly to the public, but it does list authorized buyers of such coins on its website. Reputable sellers typically fold in a 6% to 10% markup over the current gold spot price, which you can find at sites such as www.kitco.com. In addition, you’ll likely have to pay to insure and store your gold, unless you’re comfortable stashing bullion in your sock drawer.
If you’re investing in gold as a portfolio diversifier, consider an exchange-traded fund, which makes trading gold cheap and easy. Funds such as SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) track the price of gold that the trustees hold in vaults and are forbidden from lending out. Though the SPDR fund is older and bigger, the iShares fund comes with lower expenses, charging an annual 0.25% of assets, compared with 0.40% for the SPDR fund. A caveat: Because the IRS treats precious metals as collectibles (the same as a stamp collection), long-term capital gains taxes on these funds are steep—up to 28%. (The same rates apply for physical gold, should you sell it.)
If you’re especially bullish on gold, you may be tempted to wade into stocks of gold mining companies. Because these firms have relatively fixed production costs, a spike in gold prices can supercharge the companies’ profitability, and their stocks often shoot up faster than the price of bullion. (A sharp decline in gold prices has the opposite effect.) Investors looking to gold in order to diversify their exposure away from stocks should avoid miners, whose returns are more correlated to the stock market overall than to movements in bullion prices, says Invesco chief global market strategist Kristina Hooper.
Still, miners (which, unlike gold, generate earnings and dividends) have their fans among stock investors, including the Oracle of Omaha. Berkshire Hathaway, Warren Buffett’s holding company, recently bought 21 million shares of miner Barrick Gold (GOLD) for about $563 million. Matthew Miller, an analyst at investment research firm CFRA, also recommends Barrick, as well as rival Newmont Corporation (NEM). He’s optimistic about the two firms’ recently established joint mining project in Nevada, which he says should help both companies boost earnings for the next several years.
For a broad-based play on miners, consider VanEck Vectors Gold Miners ETF (GDX), which holds stock in 53 companies from across the world that mine gold and other precious metals. The fund, which charges 0.53% in annual expenses, has returned 40% so far this year. A slightly top-heavier option, iShares MSCI Gold Miners (RING), holds 36% of assets in Barrick and Newmont, compared with 26% for the VanEck fund. The iShares fund comes with a cheaper price tag, charging 0.39% of assets in expenses.
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