Gold has been a valuable and highly coveted\ncommodity for centuries. Unlike other common investment asset classes, you can\ntouch gold, see gold, and keep it in your physical possession. And since gold\nvalues tend to move inversely to the stock market, it is often sought after\nwhen the markets tank or the value of the US dollar weakens as it is now in the\nsummer of 2020. Gold is also touted as a good way to hedge against inflation.\nBut despite its historical popularity and namesake as being a \u201csafer\u201d\ninvestment option in a financial crisis, investing in gold is not without its\nown risks.<\/p>\n\n\n\n
Commodities investing is a bit different\nfrom other types of investing in that the investment is in a physical good.\nThat being the case, there are multiple avenues for investing in gold as a\ncommodity to add to your portfolio that don\u2019t always necessarily mean acquiring\nthe physical product itself. <\/p>\n\n\n\n
The first and most obvious way to invest in\ngold is by purchasing the physical product, either in the form of gold coins,\nbars, bullions, etc. Those with a fear of the viability of the US or global\nfinancial system often choose this route. You can purchase the products you\nneed from a reputable gold dealer, the US Mint, some banks, and gold brokers.\nKeep in mind you\u2019ll then need a secure place to store the gold, especially if\nyou are looking to get it insured. And should you need to cash in on your\ninvestment, you\u2019ll then be tasked with finding an appropriate buyer and selling\nprice.<\/p>\n\n\n\n
But if the physical investment sounds like\ntoo much of a commitment, there are alternative options in the market. You can\neither buy shares of stock in companies that produce gold, like mining\ncompanies, or buy shares of gold-focused Exchange-traded Funds (ETFs). Keep in\nmind, when an investor buys a gold-backed ETF, they are essentially buying\nshares of a trust\u2019s ownership in gold, not the physical gold itself. The ETF\ninvestor has no right to physical gold. These are both viable options for\nindividuals looking to use gold as a diversification tool, but don\u2019t\nnecessarily want to purchase, store, and insure the physical commodity itself. <\/p>\n\n\n\n
A third alternative involves using\ncommodities futures contractsa<\/sup> to invest. Futures contracts are a binding\nagreement between two parties wherein both agree to buy or sell certain assets\nor commodities at a specified time in the future. The gains or losses of a\nfutures contract depend on daily movements in the market, meaning either the\nbuyer or seller could lose out significantly should the price of the commodity\ndeviate too far from the agreed upon price. For example, should a buyer agree\nto pay x amount of dollars for 100 oz of gold five years from now, but the\nprice of gold decreases, they are still bound to pay the agreed upon sale price\nand, therefore, would be tied to a losing investment. On the flipside, should\nthe price of gold be higher on the sale date, the buyer will have gotten a\nbargain on the market value of the gold based on the lower price they agreed to\npay in the contract.<\/p>\n\n\n\n The bulk of gold\u2019s demand goes toward\nmaking jewelry and investment pieces such as coins and bars. [i]<\/a>Of\nthose investment pieces, the majority is held by gold-focused ETFs, government\ncentral banks, and the International Monetary Fundb<\/sup>. In fact, these\norganizations presently hold almost 20% of the world\u2019s above ground supply.[ii]<\/a><\/p>\n\n\n\n Central banks invest in gold to hedge\nagainst currency risks\u2014largely for the same reason individual investors might.[iii]<\/a>\nBecause it is a physical commodity, there is no credit risk in gold, and\nbecause gold holds value that is not attached to the dollar, it can work as a hedge\nagainst a weakening national currency. The ability to buy and sell gold also\nhelps central banks promote stability in the country\u2019s financial system. Having\nan asset that appreciates when the dollar depreciates is like having a safety\nnet in place should markets go awry.[iv]<\/a><\/p>\n\n\n\n Currently, the largest shareholder of gold\nin the world is the United States government, holding about 5% of the world\u2019s\nresource. In recent years, though, German investors have ramped up their gold\ninvesting for fear of devaluation of the Euro. In fact, some German investors\nnow own more gold than bonds.<\/p>\n\n\n\n ETFs purchase physical gold that they store\nin vaults for investors who want a low-cost, convenient way to invest in the\nprecious metal. Jewelers, most of whom reside in India, purchase the product to\nmake and sell jewelry. <\/p>\n\n\n\n Gold is a commodity that becomes\nincreasingly popular when the markets tank or the dollar weakens. Nervous\ninvestors flee their sinking equity positions and jump into the \u201csafe haven\u201d of\ngold. Investors see gold as a hedge against both risk and inflation in that the\nvalue of gold tends to rise when the markets fall and the price of the dollar\nweakens. <\/p>\n\n\n\n However, what investors fail to realize is that gold is not inherently valuable. Like other types of investments, its value is subject to change based on supply and demand and investor sentiment. Further, the price of gold often changes quickly, making it a highly volatile investment relative to other investment options. We measure this volatility by the statistical measure of standard deviation, or the degree to which the price of something varies from its average over a given period of time. The lower the standard deviation, the less volatile the investment is said to be. In the last 10 years, the SPDR Gold Trust (GLD) ETF<\/strong> obtained a 3.24% compound annual return, with a 16.05% standard deviation (Source: Morningstar).<\/p>\n\n\n\n By comparison, the exchange traded\nfund SPY, which tracks the S&P 500, obtained a 13.84% compound annual\nreturn with a 13.38% standard deviation, and the iShares MSCI ACWI ETF obtained\na 9.35% compound annual return, with a 14.06% standard deviation as of June 30,\n2020 (Source: Morningstar). Couple this with gold\nlogging its worst drawdown rate over the past twenty years and ask yourself,\nwhich investment sounds safer to you? <\/p>\n\n\n\n Investing in gold simply because its\npopularly known as a safer investment, doesn\u2019t mean it is the right choice\u2014or\neven the safer choice\u2014for you. Like any financial asset, gold is subject to\nsupply and demand pressures that cause the price to fluctuate over time. It is\nnot a riskless investment and the decision to add gold to your portfolio should\nnot be made without taking all the possible risks into consideration. <\/p>\n\n\n\n If you are unsure whether investing in gold\ncould be a viable option for you, or if your portfolio is properly diversified\nto hedge against risk in this market environment, feel free to contact the\nadvisors at William Asset Management to request a second opinion today. <\/p>\n\n\n\n Brian McKinney, CFP\u00ae <\/sup>is a\nFinancial Advisor with Williams Asset Management. Williams Asset Management is\nlocated at 8850 Columbia 100 Parkway, Suite 204, Columbia, MD 21045. He offers\nadvisory services as Investment Adviser Representatives of Commonwealth\nFinancial Network\u00ae, a Registered Investment Adviser. Fixed insurance products\nand services offered by Williams Asset Management. For additional information\nabout the services of Williams Asset Management, please call (410) 740-0220 or\nemail at Info@WilliamsAsset.com. \u00a9 Williams Asset Management. For more\ninformation about Williams Asset Management, please visit\nwww.WilliamsAssetManagement.com.<\/em><\/p>\n\n\n\n Investments\nare subject to risk, including the loss of principal. Because investment return\nand principal value fluctuate, shares may be worth more or less than their\noriginal value. Some investments are not suitable for all investors, and there\nis no guarantee that any investing goal will be met. Past performance is no\nguarantee of future results. Talk to your financial advisor before making any\ninvesting decisions. [i]<\/a> https:\/\/www.investopedia.com\/articles\/basics\/08\/invest-in-gold.asp<\/a>, 16 July 2020<\/p>\n\n\n\n [ii]<\/a> https:\/\/www.investopedia.com\/terms\/i\/imf.asp<\/a>, 16 July 2020<\/p>\n\n\n\n [iii]<\/a> https:\/\/www.usmoneyreserve.com\/blog\/why-central-banks-buy-gold\/<\/a>,\n16 July 2020<\/p>\n\n\n\n [iv]<\/a> https:\/\/www.usmoneyreserve.com\/blog\/why-central-banks-buy-gold\/<\/a>,\n16 July 2020<\/p>\n\n\n\n a<\/sup> https:\/\/www.fool.com\/knowledge-center\/what-is-a-futures-contract.aspx<\/a><\/p>\n\n\n\nWho\nactually invests in gold? And how?<\/strong><\/h2>\n\n\n\n
Debunking\nthe \u201cSafety\u201d Myth<\/strong><\/h2>\n\n\n\n
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