Investing
Ask Jean: No Golden Rule
Posted by Jean
This week’s question comes from Patricia in New Jersey:
I have money that I want to invest in gold. I want to keep the value of the money and am very afraid of the economic climate. Are gold coins, or gold stocks a good idea?
Many financial planners suggest that a portion of any well-diversified portfolio be compromised of gold or other commodities such as oil. “I wouldn’t allocate more than 5%, maybe 7% or 8% max,” suggests Cathy Pareto, President and Founder of Cathy Pareto and Associates.
When you purchase gold, you have several options. You can purchase it as an exchange traded fund, as mining stocks, as futures, or as bullion.
If you’ve never invested in gold before, Paul Mladjenovic, author of “Precious Metals Investing for Dummies,” suggests starting with bullion (high-quality gold or silver in bar or coin form) such as the American Eagle coins, which are issued by the United States Mint. He warns to steer clear of medallions or commemorative coins. “These are more expensive and have a dealer markup,” says Mladjenovic
Today, more and more investors are looking to gold instead of stocks to provide some financial stability. But before you start plotting where to stash the shiny stuff, you’ll need to consider both the positives and the negatives of investing in gold.
One of the upsides is that as long as you own gold, you own a tangible asset that is desired by others. “If I have a gold coin in my hand, it’s been recognized as having great value for thousands of years, and thousands more to come,” says Mladjenovic. While the value of gold will never be zero, it’s value will fluctuate due to changes in the market. On the downside, if you invest in gold, you won’t be paid any dividends or interest. Additionally, the IRS doesn’t consider gold an investment, which makes it subject to the 15% maximum federal capital gains tax.
Unfortunately, when it comes to investing in this commodity; there really is no one “golden rule” to follow. They key is remembering that gold, like any other investment has its risks. “As with anything, any investment, you ought to be diversified. Everything else has risk, and we can’t forget that, gold has it too,” cautions Pareto.
COMMENTS | 3 comments so far
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Let me start by saying that I am a financial planner (not the kind that sells products or manages investments), and I don’t recommend people allocate a portion to gold. First of all, gold is stuff, stuff used to make other stuff. The price of stuff does go up over time; that’s called inflation. But in the long-term, we can’t expect gold to outpace inflation. Secondly, it is costly to participate in gold investments. That means those expenses will cause gold investments to lag behind inflation in the long-run. Lastly, if you own diversified stock market investments like a total market index fund or international index, you will own some mining company stocks (which are companies, not gold). If you have a separate allocation, you are overweighting these companies. In other words, you are betting that these companies will do better than the rest of the market. Every bet has to have a winner AND a loser.
I respectfully disagree with some of the info in Dylan’s post. Let me also clarify that I too am a fee-only planner (the kind that does not get commissions on investments recommended). Ownership in gold and other precious metals has become much more efficient and cost effective with the use of ETF’s (exchange traded funds)like State Street’s Gold ETF (ticker GLD, which for purposes of full disclosure are held in my clients’ portfolios) or iShares Silver ETF (ticker SLV). The expense ratio of these funds are 0.40% and 0.50%, respectively–significantly less than most actively managed mutual funds.
I do agree that the price of gold does, in fact, go up and down over time and there are certainly periods where gold may result in a flat or even negative investment (the same holds true for investments in traditional stocks). That was presumably conveyed in Jean’s post already. Like I mentioned, as with any other investment, gold is not a “sure thing”. There are risks involved in owning it. However, gold, unlike other securities does have certain characteristics that make it a unique investment, particularly in extremely uncertain or unstable market conditions which include periods of deflation or severe inflation. That is because of gold’s unique property with a dual role as a money and a commodity. Gold is money. Money is hoarded in deflation and hyper inflationary times, so gold should act well during both conditions, we have certainly seen that during the recent economic downturn.
As a CFP practitioner and educator, I believe that today’s economic & financial environment makes gold (and silver too) a very important part of any portfolio. Financial planners that refuse to recognize the value and importance of precious metals in their client’s long-term investing strategies are, unfortunately, doing a dis-service to themselves and, more importantly, to their clients. Gold is more than merely a hedge against inflation and other economic difficulties; it is a proven investment in its own right. Gold has had 8 straight up years. It is up over 250% since January 2000. The Dow, S&P 500 and the nasdaq indexes are way down during that same time frame.
A key benefit of gold is that it does not have counter-party risk. It has its own unique value that is not contingent on someone else’s promise or performance. Stocks, bonds, mortgages and currencies can go to ZERO but that is not the case with gold. Gold does not need a bailout and gold can not be over-produced into oblivion. this is a crucial benefit in today’s uncertain and risky economic environment.
Right now, the government is on a trillion-dollar spending binge which will eventually lead to much higher inflation. many conventional investments will be negatively impacted. Most folks should consider at least 10% of their portfolio in precious metals-related investments. This includes both the actual physical gold (don’t forget silver) as well as related investments (such as stocks and ETFs).
Thank you!
Regards, Paul Mladjenovic
http://www.ProsperityNetwork.net