By Piercen Harnish
Gold is not just for your eccentric uncle with the vault in his basement and a stockpile of canned food in preparation for the apocalypse. Gold can be a useful tool for diversification, but do the positives outweigh the negatives?
Gold has been used for centuries for many purposes, including preserving wealth and hedging against weak currencies and economies and inflation. The price of gold tends to move in the inverse direction of economies. During the inflationary period of the late 1970s and the great recession starting in 2008, the price of gold skyrocketed, and people flocked to buy the commodity. We have also seen an uptick in gold during the pandemic, with its price at a new high of $2,000 an ounce!!!
Impracticality of Gold
But before you build a vault to store all of your gold bullion, let’s look at some of the reasons why gold is not a practical asset to own and dive into some of the alternatives. Purchasing physical gold involves dealing with brokers and negotiating prices, transporting the bars or coins, storing them, and then going through the whole process again if you want to sell them. It’s unrealistic for the average consumer to purchase gold.
Gold ETFs
An alternative to purchasing physical gold is gold ETFs (Exchange Traded Funds). SPDR Gold Trust and iShares Gold Trust do all the work for you. These liquid investments are traded on the stock exchange, and you are purchasing the gold value in a trust, not physical gold. It is a good way to dip your toe into the commodity water, but beware, capital gains are taxed as collectibles at ordinary income rates as much as 28%. (1)
Gold and the S&P 500
You can also buy shares in gold mining companies such as Newmont, Wheaton Precious Metals, and Barrick Gold. Never heard of these companies? Of the three, Newmont is the only Fortune 500 company listed. The metals and mining industry makes up a small portion of the S&P 500. Metals and mining fall under the materials industry in the S&P and make up less than 3% of the index. Of that small percentage, gold makes up 8.02%. (2) If you own an ETF in your portfolio that tracks the S&P 500, you already have exposure to gold and the mining industry.
*Pay attention here!!
EVEN THOUGH GOLD MAY SEEM LIKE A SURE THING BECAUSE OF ITS STORED VALUE, IT HAS ONLY RISEN BY AN AVERAGE OF 1.1% A YEAR DURING THE LAST CENTURY; COMPARE THAT TO 6.5% FOR STOCKS. (3) THE NUMBERS SPEAK FOR THEMSELVES.
The Bottom Line
Buying gold is impractical because of transportation, storage, and negotiating. Buying gold mining stocks is like owning any other stock. It’s based on the fundamentals of the company, not just the output. While gold ETFs are a better alternative, beware of taxes and having too much of a concentration in one asset, especially considering you may have exposure if you have investments that track the S&P 500.
As with any significant investment decision, consult your financial advisor. We at Shelton Financial Group are here to walk you through the pros and cons of owning commodities and would be happy to discuss how gold can be a part of your portfolio. Reach out to us at 260-436-7006 or schedule your free 30-minute Fit Call online.
About Shelton Financial Group
Shelton Financial Group is an independent, multi-generational firm in North East Indiana that takes a team approach to addressing their clients most pressing financial concerns. SFG was founded in 1996 with the mission of helping people enjoy their wealth. Using their proprietary “One Life Formula,” the team at SFG focuses on what matters most to their clients and what they can control, integrating their wealth management needs with other aspects of their financial picture. To learn more about Shelton Financial Group and how they can help you achieve financial independence, visit them online.
(1) https://www.fool.com/investing/2020/07/24/thinking-about-buying-gold-consider-these-alternat.aspx
(2) https://advisor.visualcapitalist.com/sp-500-sectors-and-industries/
(3) https://www.nytimes.com/2020/08/08/opinion/gold-investment-coronavirus.html
