Is Now the Time to Buy Gold?

Key Takeaways

•  Despite what the ads claim, gold is not a surefire store of value or a reliable hedge against inflation.

• Notwithstanding gold’s recent surge, returns were flat for over a decade and lagged stocks and bonds.

• For hedging against inflation, TIPS, real estate, stocks, and intermediate-term bonds are usually more effective -- with lower fees and less work.

• Gold investors must contend with high volatility, multiple fees, less favorable tax treatment, and a lack of dividend or interest income.

Occasionally, certain alternative asset classes will start making a run. Invariably, clients hear about it from the media and wonder if now is the time to buy. Take gold for example. For the better part of a decade, it was holding steady at $1,600 to $1,800 per ounce and suddenly it’s over $2,500.

Gold has long been considered an inflation hedge and a safe store of value during tumultuous times. But we still don’t believe that gold is in the best interests of our clients for many reasons. Whenever people see crypto, Nvidia, or any other asset skyrocket in price, there’s always a feeling of FOMO (Fear of Missing Out). But don’t be seduced by the headlines. If you’re holding gold now might be a good time to reduce your position or get out entirely.

Even though inflation is slowing down, it remains a major concern. So why would adding gold to your portfolio as a hedge make sense? Let’s go back to 2022 when inflation was at its highest point in recent memory and running about three times higher (on an annual basis) than it is today. Gold barely budged in 2022.

Gold isn’t as great an inflation hedge as you might think. But since it’s tangible, clients often think it’s a great place to store value during a time of lower interest rates which many expect the Federal Reserve to start doing in September.

While it’s true that gold typically appreciates during periods of lowering interest rates, we feel that other assets, such as intermediate-term bonds are more appropriate for our clients than gold. As interest rates decline, intermediate-term bonds will appreciate while also paying dividends. In addition, concerns about the global economy have already been baked into the price of gold. Hence, the expectation of further appreciation of gold is reduced.

Gold is also an asset that people have historically turned to during conflicts and other geopolitical risks, as it may be preferable to paper currency if the economic system is collapsing. But that doesn’t explain gold’s recent surge either. No one knows why gold has surged over the past year, but like Bitcoin, it’s a speculative asset and from time to time it gets some momentum behind it.

Another reason we don’t like gold is that it doesn’t produce any income. It doesn’t pay dividends or interest payments like a stock or bond. It’s not like a company that will generate revenue and profits over time. By contrast, gold goes up when enough people think it will go up and it goes down when enough people feel it will go down.

Another reason gold gives us pause is because it’s very volatile. In 2020, during the

pandemic gold swung wildly between 1,400 and 2,100 so depending on your timing, you could have made (or lost) up to 50%. In 2011 gold had a huge runup like it’s having today, and suddenly cratered for no apparent reason.  It didn’t move much from that low point for the better part of a decade. Even with the most recent runup in gold prices, it has only returned about 3% annually since 2011 (excluding fees), vs. over 10% for stocks.

Let’s consider a hypothetical scenario.  You want to buy a one-ounce American Eagle, the best-known U.S. gold coin. If you buy from a reputable dealer or online, you’ll pay a fee of roughly $150 (5.6%) for a coin worth $2,500. Then when it comes time to sell it, it’s a physical asset so you’ll have to go through a pawnshop, or a gold dealer and they’ll take an additional $50 to $100 (2% to 4%) fee for each ounce you sell. In addition to the large spreads, you’ll need to pay for either insurance or storage (or risk storing it in a home safe). It’s not nearly as liquid or convenient as selling stocks or ETFs on an open exchange. To break even you would have to see a price increase of roughly 10% - not including potential annual fees.

While gold ETFs offer a more convenient alternative to physical gold, it's important to note that they still come with annual fees ranging from 0.25% to 0.5%.  Given the various costs associated with gold and gold ETFs, we don't consider them a reliable hedge against inflation.

Better Ways To Hedge Against Inflation.

For our risk-averse clients, we recommend TIPS (Treasury Inflation Protected Securities) which are government bonds that pay a modest fixed yield but will also adjust to inflation. In periods of higher inflation like today, the yield will increase to keep investors ahead of inflation.

. And when your stock portfolio is sufficiently diversified, you’ll have some companies paying income and some expecting price appreciation. With gold, by contrast, you’re just holding a single asset that pays no income, and you have no idea whether it will go up or down. Real estate also makes sense as an inflation hedge for most of our clients because, during times of higher prices, landlords can raise their rents on tenants to cover higher operating costs.

Tax Implications

Finally, considering the tax implications of holding physical gold reveals several issues. If you sell gold at a loss, you must retain detailed receipts for all your purchases to substantiate the loss. When a stock is sold the custodian manages all the necessary paperwork, simplifying the process. Additionally, because gold is classified as a collectible, gains are taxed at a higher rate of 28%, whereas long-term capital gains from stocks are taxed at a more favorable rate of 15% to 20%. These factors make holding physical gold less ideal from a tax perspective. Not ideal.

Conclusion

If you or someone close to you has questions about alternative assets or hedging against inflation, please don’t hesitate to reach out. We’ve helped many clients like you in similar situations.

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RYAN A. DUNN, CFP®, is a Wealth Manager at Novi Wealth