By Thomas Kostigen
Gold has historically been thought of as a hedge against the capital markets. And with increased volatility in the stock market due to the coronavirus pandemic, gold prices have shot up, breaking recent records.
Should you be investing in gold? That’s a good question for an investment professional like a financial advisor. But if you are looking to go for the gold yourself, there are a few things to keep in mind. First, there is the question of whether it’s still a good time to buy gold after the run up in prices-gold is inching toward it’s an all-time record high of just over $1,900 an ounce in 2011-and considering post-pandemic stock market conditions.
Barron’s suggests that gold is actually not the best place to guard against capital market swings and/or U.S dollar weakening. It points to forecasts that the US dollar may weaken as much as 35 percent because of the trillions of dollars of debt the Federal Reserve has taken on with the recent stimulus spending, as well as a longer-term trend away from the US dollar being held out as the world’s major currency. Barron’s notes that these indicators should have investors looking to safe harbors such as gold, but that “foreign stocks have done a better job hedging the U.S. dollar over the past 50 years.”
If foreign stocks aren’t your thing and you still are eyeing gold as an investment, then in what form to buy it should be the next question. You can buy gold on the spot market, like any commodity. For this, you’ll need to open a special trading account. Or you can buy gold in its physical form. Gold bars, for instance, can be had at online outlets-even eBay. Just ensure that the gold retailer is reputable. (Gold bars should be 99.5% pure gold.) There are also gold mutual funds and exchange traded funds. These are often categorized as precious metal funds. Gold-backed ETFs have seen their biggest inflows ever this year. Funds offer an affordable way for smaller investors to play the gold market.
An indirect way to purchases gold is to buy shares in gold companies, through a fund or directly. These are usually gold mining companies, or indexes of gold mining companies.
To be sure, expense ratios and management fees are the things to look for when vetting a gold fund. You want the least amount of “friction” when investing in the gold market. Friction costs are those in addition to the asset you are buying.
Of course, you can invest directly in gold mining stocks. Gold companies bring up other considerations, though. For example, is the gold being mined in a sustainable way? There is additional risk involved with mining companies because of this challenge, of course. Most notable, labor and environmental standards.
A bigger question for anyone looking to buy gold as an investment is what they are hoping to accomplish? If it is appreciation, gold may not provide the biggest return on investment. If it’s safety, there may be other hedges to consider in the credit market or through international indexes.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.