Gold is regaining its sparkle in an uncertain market with renewed attention to this ancient asset as a portfolio diversifier.
The yellow metal is often seen as a safe-haven asset much like U.S. Treasury bonds or cash, an investment that retains value when riskier assets fall.
Along with stock market uncertainty, several factors currently drive the gold market price, including the direction of the U.S. dollar and concerns of an economic slowdown. Geopolitical worries in the U.S. and the Europe, such as the recent government shutdown, and failed Brexit talks in the U.K., make gold shine as a safe haven.
But gold doesn’t act like a modern asset — it has no quarterly earnings reports nor produces a yield. So interested investors need to think about what kind of role it plays in their portfolio. Currently, Nymex gold futures price per ounce is about $1,300.
Here are a few considerations for investors who are thinking about owning this precious metal.
— Gold is traditionally used as a hedge.
— Different ways to own gold.
— Limits to gold investments.
[Read: 5 Reasons Not to Invest in Gold.]
Gold is Traditionally Used as a Hedge
Gold usually moves in the opposite direction of stocks; it is often touted as an insurance policy against weakness in the stock market.
Will Rhind, CEO of GraniteShares, which issues the GraniteShares Gold Trust (ticker: BAR) exchange-traded fund, says the metal is “pretty much uncorrelated with every other asset class.”
That relationship is clearest with the U.S. dollar. Gold is denominated in dollars, and the precious metal often moves inversely with the greenback, falling when the dollar rises and vice versa. Gold prices are generally stable because it is a real asset.
“To increase the supply means bringing on new mine production, which is not an easy thing to do, (keeping) the supply relatively stable,” he says.
There’s also no counterparty risk with gold, which makes it a high-quality asset, Rhind adds.
“Everything else in the portfolio has some element of credit risk or counterparty risk,” he says. “Governments default on their debt, corporations can default. Gold can’t declare bankruptcy.”
Juan Carlos Artigas, director of investment research at the World Gold Council, the gold industry’s market development group, says gold plays a unique role versus other risk-management assets.
When stock prices are close to their historical average prices or fall by more than two standard deviations, gold prices move in the opposite direction, according to research conducted by the World Gold Council based on data collected from January 1987 to December 2018.
Standard deviation is how much an asset moves from its average price. When stock prices rise more than two standard deviations, gold’s value also rises. That’s because of gold’s dual nature, he says.
[10 Ways to Maximize Your Retirement Investments.]
“Gold is both a consumer good, a luxury item as well as an investment,” Artigas adds.
Richard Hayes, CEO of The Perth Mint, Australia’s largest precious metals refining, minting and depository enterprise and the second-largest global gold producer, says gold is often used as an inflation hedge and a store of value.
Conventional wisdom holds that gold should only be a small part of a person’s portfolio, Hayes says, anywhere from 5 to 10 percent of a total portfolio allocation.
“That allows investors to do two things,” he says. “It allows them to hedge, but it also allows investors to move themselves perhaps a little bit further out on the risk curve that they otherwise might not be as willing to do because gold provides that ultimate hedge.”
Different Ways to Own Gold
Precious metal experts say for investors who simply want exposure to the gold market price, ETFs are a more efficient way than buying coins and bars. There are several types of gold-backed ETFs following the spot gold price, usually trading at some fraction of the price of gold per ounce. Most of the ETFs are cash-settled, meaning when investors sell they receive money. But investors in the Perth Mint Physical Gold ETF ( AAAU) have the option to take physical gold delivery.
ETFs are a cost-effective way to own gold, since they can be instantly bought and sold on stock exchanges and are deeply liquid. People who buy gold coins or bars need to have safe storage and transaction costs are higher since gold dealers charge premiums to conduct business.
“Physical gold is really more for gifting,” Rhind says. “People derive a lot of enjoyment from owning coins and passing them down. But it’s really not about investing in the way we talk about stocks.”
Adrian Day, CEO of Adrian Day Asset Management, says people who use ETFs to buy gold generally do so as a portfolio diversifier and to hedge against risks, such as inflation or a falling stock market. Physical gold buying often comes after significant geopolitical events.
“Then you’ll see physical buying go up, and that’s a different investor and a different motivation,” Day says.
Hayes says although the AAAU allows investors to receive physical gold instead of cash when they sell the ETF, no one has asked for payment in physical metal.
[See: 7 ETFs to Ride the Gold Rally.]
Limits to Gold Investments
Rob Haworth, senior investment strategist of wealth management at U.S. Bank, says while gold can provide some benefit. He says it’s a weaker portfolio diversifier compared with other safe-haven assets like Treasury bonds. Gold performed well in the fourth quarter of last year because of a falling U.S. dollar and real interest rates.
“Typically when you’re seeing declining real yields, it might be a sign of stress and distress in the market,” he says. “And that’s when gold tends to do well.”
Gold works well in a portfolio in certain economic scenarios, but not all.
Haworth says initially during the Great Recession, gold held its value when real interest rates and the dollar fell. However, eventually there was so much distress in the market at that time and gold prices fell, leaving U.S. Treasurys as the best-performing asset.
“Gold was the dominant performer and then people started to migrate away from gold because it provided no cash flow,” Haworth says. “That’s kind of its Achilles’ heel. In real downfall scenarios is (there is a) lack of cash flow, which is why you ended up in high-quality government bonds. During that situation people want cash and they (sell) gold to raise capital.”
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