Gold prices have been exhibiting some odd behavior lately. Sure, the precious metal has moved higher as tensions in the Middle East boost its safe-haven appeal. And gold has fluctuated based on any given day’s expectations for the Federal Reserve’s interest rate course.
Meanwhile, this year Treasury yields have been rising, and the U.S. dollar has gained ground slightly against a basket of other currencies. Gold often moves lower when the greenback appreciates as a stronger dollar makes gold more expensive for dollar holders, dampening demand. But in late May, gold prices hit a record high above $2,400 and the S&P 500 index also hit its highest point ever, above 5,300 points. Gold is often viewed as an alternative investment that can perform well when stocks are on the back foot. What gives?
Like many things in the commodities world, part of the answer can be traced back to China. China’s central bank has been on a gold-buying binge. Official gold reserves have risen 18 months in a row, as of April, and its hoard reached 2,264 tons, according to the World Gold Council. Gold’s share of the Asian nation’s foreign exchange reserves is at a record high, as China looks to diversify away from the U.S. dollar.
Meanwhile, Chinese retail investors have also been buying gold. They’re also looking for a currency hedge, as well as a hedge against softening in their domestic equity and property markets. Chinese physically backed gold exchange-traded funds, or ETFs, recorded record inflows in April, the World Gold Council reports.
With the strong underpinning to the market from China, coupled with gold’s traditional role as a safe haven and currency hedge, investors may naturally be wondering what they need to know if they want to invest in gold. To address this hot topic, we asked the financial advisors who write for the U.S. News Advisor’s Corner series to weigh in on some of the most popular questions from internet searches now about gold and give their thoughts on the direction investors should take in today’s market climate:
Is Gold a Good Investment Now?
JULIE: Gold goes in and out of favor on a regular basis, but interest tends to rise more feverishly when the Federal Reserve’s monetary policy is in flux. The U.S. inflation report on May 15 came in cooler than expected, in conjunction with a drop in the U.S. dollar index and Treasury yields, feeding renewed momentum for gold’s favorability.
With the precious metal’s prices looming near record-breaking highs, ownership can certainly be a test of an investor’s stomach for risk. Many market analysts believe that there will be new headwinds in the near term. Blue-chip U.S. tech stocks, such as Amazon.com Inc. (ticker: AMZN), Apple Inc. (AAPL), Meta Platforms Inc. (META) and Nvidia Corp. (NVDA), have been nudging gold’s traditional role as a hedge against inflation and currency depreciation.
KATE: It’s always a good idea to diversify into gold and other precious metals. Gold does have a role as a hedge against equity market volatility, so it’s worth holding to help smooth returns.
SCOTT: Gold has been useful for consumers in a variety of contexts for centuries. In fact, the first gold coins were introduced by King Croesus of Lydia (now part of Turkey) around 550 BC. In 2024, gold has captured investors’ attention because its price per troy ounce this year has increased by 14.36%, through May 23. Not too shabby. Still, for investors who are looking for a longer track record of growth potential, equities still have merit. For example, through the end of 2023, the 10-year return for U.S. stocks reached 12.75%, while gold averaged only averaged 4.57% in the same time period, according to data from Statista.
JULIE: Because of its unique characteristics, it is vitally important to have clarity on why an investor wants to add gold to their portfolio. After all, gold does not generate either interest or dividends, so ill-timed movements can have high opportunity costs. Many do see it as a safe haven when the economy is floundering, but taking a reactive approach can cause an investor to buy on an emotional basis, rather than truly crafting a well-diversified portfolio.
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What’s the Best Way to Own Gold?
JULIE: There are two ways to own gold: directly owned physical gold in the form of gold bars, coins and even jewelry. Or, indirect ownership options include ETFs, gold futures contracts and stocks from companies that encircle the production of gold, like mining operations or refineries.
Physical gold is the purest form of ownership, but gold is bulky, costly to have delivered, challenging to store and even more challenging to insure. Gold coins and gold jewelry may be sold at a premium over its actual value because they are easier to move and are available in smaller amounts. It is imperative that you work with a reputable seller as many investors have learned too late that their physical gold is either unacceptably impure or an outright forgery.
KATE: While everyone’s situation is different, many long-term investors find that owning gold stocks through an index fund serves the purpose of diversification.
RITA: Yes, one of the most efficient ways to own gold is through ETFs.
JULIE: Indirect ownership resolves many of the limitations, but some forms pose new challenges, as you don’t have physical ownership of the assets. For example, futures and options are highly speculative. Also, many purists believe that gold’s highest value is that it’s a hedge against major forms of economic disruption. For example, in the event of a large-scale cyberattack or economic collapse, an investor may not be able to access their brokerage account or its assets on a timely basis.
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Why Is the Price of Gold High at the Same Time Stocks Are Hot?
JULIE: Many gold enthusiasts still remember the 1970s, a trifecta of recession, double-digit inflation and soaring oil prices. Long lines at the gas station are etched into their memories. As an investment, gold performs best when conditions are at their worst. Now, it’s easy to pick up any newspaper, watch any TV or hear one’s tech device chime with another notification of current turmoil — multiple global wars and instability, persistently elevated inflation, social unrest on college campuses and political upheaval in a contentious election year. For many, physical gold can be comforting. They can see it, touch it and have a general idea of how it will behave as an investment in these circumstances.
KATE: While stocks are a proven hedge against inflation, gold can also play that role. Gold tends to increase in value as the dollar falls. The dollar is currently trading lower than its 2022 high.
RITA: Right, people invest in gold because gold is a valuable commodity. Gold can serve as a hedge against inflation and is considered an alternative asset, other than cash, stocks or bonds, and often retains its value during times of political and economic uncertainty. Gold is also considered a portfolio diversifier and non-correlated asset, which means that movement in its price moves independently from movement in stock prices.
KATE: Other reasons why gold can rise in tandem with stocks include worries about geopolitical uncertainties and interest rates, both of which are affecting investor sentiment at the moment.
U.S. NEWS: Despite the short-term correlation between equities and gold, some of the current strength in gold has been attributed to its safe-haven allure. The conflict in Gaza increased geopolitical risk that was already elevated by the ongoing war in Ukraine.
Also, as an investment that is considered relatively safe, gold competes against government bonds. But unlike bonds, gold doesn’t pay any interest. So, when interest rates decline, the precious metal becomes more attractive.
One of the key long-term worries that have shifted investors toward gold has been the amount of debt created by the central bank. And as we’ve been seeing from China, central banks also buy gold directly, forming a foundation of support for prices. They hold gold to diversify their reserves, as the metal can serve as a cushion against volatility in currencies and bonds. Global central banks boosted their gold purchases to more than 1,000 tons per year in both 2022 and 2023, with the buying dominated by emerging market central banks, according to the World Gold Council.
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What Percentage of My Portfolio Should I Allocate to Gold?
JULIE: A long-held investment philosophy is that no single asset should dominate one’s portfolio. Diversification can be an investor’s friend, and alternative investments such as precious metals are no exception. A professional investment advisor can be invaluable because they can recommend a portfolio that will embrace gold’s positive attributes, while avoiding an emotional overreaction by overweighting in precious metals. Additionally, an advisor who specializes in these kinds of alternative assets may also be able to introduce other metals, such as silver, copper, platinum or palladium, with greater room to appreciate. As part of the Green New Deal, other in-demand metals, such as lithium, can also have a role to play in creating the desired diversification.
KATE: Investors should treat gold, and precious metals in general, like any other asset class in a diversified portfolio. That means avoiding the temptation to tilt too heavily toward gold even as the stock market is heading south. Many advisors recommend an allocation to gold in the neighborhood of 5% to 15%, so if you find yourself holding a greater proportion of gold in your portfolio, consider rebalancing.
SCOTT: For investors who want to own gold for the purpose of diversification, Morningstar suggests a weighting cap of no more than 15%. As a side note, as of May 24, the price of silver has increased by more than 26% year to date. Silver has more industrial and commercial use than gold, but it does not offer as much portfolio diversification as gold. Gold prices tend to move in the opposite direction of the overall stock market, while silver prices often track with the rise and fall of the stock market. But investors can also gain access to silver in a variety of formats, including ETFs, mining stocks and coins.
RITA: Diversification is one of the most fundamental principles of investing. There is a distinction between owning gold and investing in gold. With that in mind, it is important to allocate no more than 10% of your portfolio to gold. Your exact allocation depends on your age, risk tolerance and time horizon.
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Can I Invest in Gold as Part of My IRA or Brokerage Account?
KATE: Yes, you can invest in gold stocks in an IRA or a taxable brokerage account. In a self-directed IRA, you can hold gold bars or gold coins, but you’d have to arrange for storage, which some investors consider a greater hassle than simply owning stocks of gold mining companies.
JULIE: Gold IRAs can be advantageous for all the same reasons as a traditional IRA, but there are strict guidelines in order for transactions to pass muster with the IRS. The gold must be in an approved form (bullion or coins) and it must be transferred to an approved depository under very specific direction. While the IRA is self-directed, the investor cannot have physical possession of the asset, mirroring the traditional IRA requirements.
Two important disadvantages include potentially higher fees due to those transportation and storage requirements, and challenges in optimally redeeming gold to meet minimum distribution rules on a timely basis. Fortunately, as gold has become more popular, many more institutions have entered the gold IRA market, giving investors more acceptable choices.
RITA: One of the most efficient ways to invest in gold as part of your IRA or brokerage account is through gold stock, gold mutual funds or gold ETFs. Some of the advantages include lower minimums, liquidity and access. Investing in physical gold comes with insurance premiums and the storage fees you mentioned. Investing in gold mutual funds and gold ETFs does not involve costs associated with storage and insurance but does have management fees and expenses that can affect your overall investment returns.
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What Characteristics of Gold ETFs Should I Look For?
KATE: As the name suggests, a gold ETF tracks the price of gold. These can be traded on major exchanges like stocks, providing an easy way to get exposure to gold. For example, the largest gold ETF, SPDR Gold Shares (GLD), tracks the performance of the price of gold bullion, minus fund expenses. Other gold ETFs, such as the VanEck Gold Miners ETF (GDX), are composed of stocks, such as Newmont Corp. (NEM), Agnico Eagle Mines Ltd. (AEM) and Barrick Gold Corp. (GOLD).
RITA: Gold ETFs do offer liquidity, access and transparency. GLD and iShares Gold Trust (IAU) are among some of the most popular. These ETFs allow investors access to gold without buying physical gold bars. Investors own shares of the ETF, which is typically structured as a trust.
KATE: Although gold mining stocks’ movements are correlated with the price of gold, company-specific issues can potentially take some shine out of those stocks, even while gold bullion is trading higher. That could cause a divergence in the price of gold mining ETFs relative to the price of a gold bullion ETF.
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U.S. News Takeaway: Ways to Invest in Gold Now
A popular way to own gold is to buy the physical metal, but as our advisors indicated, you have to weigh the pros and cons. There are many ways to invest in gold, so here’s a brief rundown with specific investing ideas:
Gold Bars and Coins
“Investors can take delivery of the coins and bars, giving them a higher degree of comfort if they are purchasing gold for catastrophe insurance,” says Chris Gaffney, president of world markets at EverBank. “But this form of holding gold is also the most expensive, as there are premiums associated with each coin/bar in addition to the cost of storage and insurance.”
Plus, if you want to sell your gold, dealers tend to only buy it at a discount.
Gold ETFs
Investors who want exposure to physical gold without the hassle of storing and insuring it can consider physically backed gold exchange-traded funds, or ETFs, which have shares tied to gold stored in bank vaults.
Gold Mining Stocks
Investors can also buy stocks of gold-mining companies, or ETFs that group mining companies together based on certain criteria.
Gold Royalty and Streaming Stocks
Gold royalty and streaming stocks, such as Franco-Nevada Corp. (FNV), Royal Gold Inc. (RGLD) and Wheaton Precious Metals Corp. (WPM), can offer other options. In a royalty deal, a company pays a miner upfront and later receives a percentage of the revenue that a mine generates. In a streaming deal, a company pays a miner an upfront price for a percentage of the metal produced by the mine.
Gold IRAs
Additionally, a gold individual retirement account is an option that offers tax advantages. A gold IRA allows you to invest part of your retirement savings in gold and other precious metals, with a chance to qualify for similar tax breaks to those offered by a traditional or Roth IRA.
Gold Futures and Options
Investors can also consider gold futures and options, but these can be quite complicated and may require more maintenance than stocks or funds. For the most part, investing in derivatives like futures and options has higher risk involved and is best left to the pros.
For more answers to commonly asked questions and common topics encountered by the advisors, visit Advisor’s Corner.
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Is Gold a Good Investment Right Now? originally appeared on usnews.com
Update 06/03/24: This story was previously published at an earlier date and has been updated with new information.
