Are gold and other precious metals effective portfolio diversifiers for retirees? Many investors see gold as a hedge against stock-market volatility, but its role can vary.
Gold is a frequent diversifier because of its low correlation with other asset classes, such as stocks and bonds. It can also help mitigate risk during volatile markets and hedge against inflation.
Despite this, investors shouldn’t consider gold a strategic asset, according to a March 2024 article from Morgan Stanley. “In addition, gold historically has exhibited an inverse relationship to the U.S. dollar, meaning as the dollar weakens, gold prices tend to rise,” Morgan Stanley analysts wrote.
However, gold doesn’t generally produce income, a chief concern for retirees. Its price can also be volatile and underperform during growth-driven market rallies.
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Comparing Silver and Gold
Gold and another precious metal, silver, notched similar performance in 2024. The iShares Silver Trust (SLV) posted a year-to-date return of 26.86%, while the SPDR Gold Shares (GLD) returned 26.84%. In both cases, those are the best yearly returns since 2020.
Some of silver’s value is tied to its use in various industrial applications, such as solar panels, medical technology and electronics. In times of economic recovery or when the supply of silver is constrained, it can outperform gold.
For example, in 2020, silver outperformed gold by a wide margin as demand outstripped supply.
However, on the whole, silver is less popular than gold among retail investors. The SLV ETF has $14.5 billion under management, compared to the GLD ETF’s $74 billion.
For these somewhat different reasons, gold and silver can offer portfolio diversification beyond equities and fixed income.
A Safeguard Against Market Volatility
Gold can help investors preserve buying power despite currency devaluations, said Alex Ebkarian, co-founder and chief operating officer of Allegiance Gold in Calabasas, California, in an email.
It can also be used, he said, to properly diversify portfolios to improve risk-adjusted returns, as it often moves independently of stocks and bonds.
“Gold can protect your investment portfolio against future unknown or unforeseen economic or geopolitical events by providing a safe alternative to traditional paper-backed assets during serious events or financial crises,” he added.
That was the case during the financial crisis of 2008 and 2009 when the overwhelming majority of equity and fixed-income assets lost significant value quickly, Ebkarian said. However, gold prices increased during that time.
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Gold Holds Intrinsic Value
The value of paper-backed assets is derived from a contract or document rather than a physical commodity. These assets include stocks, bonds, exchange-traded funds and mutual funds.
Unlike tangible assets such as gold or real estate, the performance of paper-backed assets depends on the entities behind them, such as corporations or governments, rather than their intrinsic value.
“Gold remains a hedge against inflation,” Ebkarian said. “Even though inflation is heading down now in the U.S., there are still signs of it and consumers still feel the pinch at the market.”
He pointed out that since January 2000, the dollar has lost buying power while the value of gold has increased.
“Here, gold is a better store of value than the paper dollar,” he added.
A Geopolitical Safe Haven
Gold’s potential benefits extend beyond inflation protection. Its role in international trade, as well as a degree of scarcity, have contributed to its rise over the past two decades.
“Pundits have typically promoted gold as a hedge against inflation. As a real asset, gold should increase in value during inflationary periods, but the relationship has been mixed,” said Chris Pape, owner of Pape Financial in Bentonville, Arkansas, in an email.
However, he said, other real assets and equities are potentially better ways to offset consistent inflation.
As countries such as China, India and Russia attempt to move away from the dollar, they are turning to gold to facilitate international trade and keep the U.S. from freezing their dollar holdings, Pape noted.
“This is likely the primary driver of the upward trend in gold prices over the last year and the main reason I want to see an allocation in client portfolios,” Pape said.
Pape advises clients to keep an allocation of between 2% and 5% in gold.
Tax Efficiency and Wealth Preservation
As a physical asset, gold doesn’t generate dividends. That’s both an advantage and a disadvantage for retirees.
The lack of dividends can be bad for investors who need income, but for wealthy investors, it can mean tax savings, said Dale Hershman, owner of Sick Advisory Services in Boca Raton, Florida.
“Long-term capital gains on dividends can be anywhere between zero percent and 23%. Stocks that are not held in tax-sheltered accounts may have to pay these taxes every year,” Hershman said.
However, an investor could own a substantial and growing supply of gold for decades without paying any taxes on it, he said.
“So, simply put, the less income an investor needs, the larger his exposure to gold should be,” Hershman said.
For very high-net-worth investors, keeping as much as 40% of their portfolios in gold could be reasonable, he added.
“That way, they can achieve inflation protection and asset appreciation in a very tax-efficient manner,” he said.
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How Much of Your Retirement Portfolio Should Be Gold and Precious Metals? originally appeared on usnews.com
