Is This A Good Time to Invest in Gold?

I’ve been asked several times recently if gold should be a part of one’s portfolio to hedge against uncertainties such as inflation, a pandemic economy, high federal debt or a contested election. If you think the U.S. is ready for imminent and complete collapse – think France in WW II – and you and your family will have to flee with only the belongings you can carry, then sure, gold will always have value to someone and is relatively easy to smuggle across a border. As a hedge, however, my personal preference would be boxwoods. Here are my thoughts:

• Investors sometimes purchase gold to replace a portion of bonds in their portfolio in the hopes gold will increase in value when stocks fall, interest rates rise and inflation soars. In reality, unfortunately, history shows it doesn’t always work that way;
• A study by the National Bureau of Economic Research and Duke University’s Fuqua School of Business showed gold doesn’t move predictably against interest rates or inflation. In fact, it truly only increases in value when there is added demand as the supply is fairly constant;
• Furthermore, the gold market is a small one, controlled by a few very large investors like central banks that can move the gold price in unexpected ways. That adds risk to this asset class, not comfort;
• And one must look no further back than this past March when stocks took a tumultuous tumble and gold lost value at the same time to see that gold isn’t a guaranteed hedge against a falling stock market;
• Gold prices peaked in 1980 and, if you bought then, you’ve lost money ever since. Gold is up 21.25% this year but a stock mutual fund many of our clients own, T. Rowe Price Blue Chip (TRBCX), is up 25.8%;
• None other than Warren Buffett says about gold, “It just sits there and looks at you”, which reminds me of what my high school French teacher said about me after asking me to conjugate a verb. What Buffett meant, however, is that gold produces no value such as paying a dividend or, unlike silver, use in industrial and medical products;
• Buffett did cause a bit of a stir earlier this year when his Berkshire-Hathaway purchased a small amount of stock in a gold and copper mining company called Barrick Gold. Purchasing a small portion of a dividend-paying company, however, is different than purchasing the mineral itself. In fact, many large cap mutual funds own mining company stocks.

While investing in gold is supposed to help an investor’s portfolio when bad things happen, in reality it tends to add risk and uncertainty. So, keep gold where it belongs – on your fingers and hanging from your ears and wrists.

Steve Byars, CFP®