Despite the constant media chatter about the price of gold, many financial advisors warn that even sophisticated investors should not expose large portions of their portfolio to gold, and that purchasing the physical product is generally not a wise investment decision.
The price of gold has made headlines for the past several months, closing at an all-time high of $1,242.70 a troy ounce on May 12, only to fall slightly from those levels. With the rising price of gold over the past year has come heavy commercial rotations from firms touting the sale of physical gold and other precious metals.
It’s now even entered the political debate, after Rep. Anthony Weiner, D-N.Y., released a report last month warning consumers to shop around when purchasing gold, specifically targeting the California-based large gold retail firm Goldline.
Generally, financial advisors say average investors should purchase a commodity- or metal-based exchange-traded fund or mutual fund to get exposure to hard assets.
“I use commodities as an inflation hedge for my clients and I will not advise gold exclusively unless the client specifically asks for it,” said Rebecca Hall, a certified financial planner based in Reston, Va.
There are multiple issues that come with purchasing physical gold, notably the mark-up, liquidity and its storage costs, advisors said. There are also a multitude of products, ranging from bars to rare collector coins, which can complicate a purchase.
While gold trades currently at about $1,225 a troy ounce, buying the physical gold at retail is well above that amount. The U.S. Mint-produced one-ounce gold bullion American Eagle, which is purchased for its gold content instead of its collectability, can range between $1,270 to $1,328 per coin based on the published prices on several well-established dealers such as Goldline, Monex or Gainsville Coins.
In addition, gold dealers do not buy gold back at their “sell” prices, buying gold back at a percentage below the current bullion price of the gold content of those coins, typically between 5% and 20% below the current spot price of gold.
“You’re making a big financial commitment to the metal with [physical metal purchase companies],” said Ken Kamen, a financial advisor with Mercadien Asset Management. “I’m always suspect of any investment that has infomercials on TV in the middle of the night.”
“When I have a client who wants to have physical gold, I usually raise issues like purchase cost and storage and they realize the costs to own physical product are higher than initially thought,” Hall said.
Both Hall and Kamen recommend gold funds as only part of a precious metals component to an portfolio, which in turn should be 5% or less of a client’s total portfolio.
Wealth advisors recommend clients interested in precious metals focus on an ETF, such as SPDR Gold ETF (GLD), because it’s easier to enter and exit positions.
In the Bunker
Of course, because an ETF is not a tangible asset it does lose its appeal to those who are of an extremely bearish mindset about the future of the global financial system.
“There’s a psychological component to the gold trade,” Kamen said. “You get arguments like it’s a storehouse of value, hedge against inflation; it’s never worth zero, etc. However, if you’re going to make meaningful investment based on those arguments, you get into issues like the carrying costs, the spread and storage. Those can make physical gold a bigger problem than it’s worth.”
“We’re never advise clients to buy gold against the potential that the world may collapse,” said Howard Hook, a financial advisor with Access Wealth Planning. “As it relates to clients, gold is a diversifier; it’s a hedge against inflation.”
He also recommends hard assets as just a small part of a portfolio, no more than 5%.
Other ways to play gold are through exposure to gold mining companies, such as Barrett Gold (ABX), AngloGold (AU) or Newmont Mining (NEM). Even more broadly, consider gold as a commodity play.
“We’re in a commodities super cycle. I would want to make a bet on a broader commodity play based on infrastructure needs instead on one mostly non-industrial metal,” Kamen said.
Advisors do say that if someone absolutely wants physical gold, it’s best to purchase bullion coins from the major mints like the U.S., Switzerland, Austria and others. Bullion coins are valued exclusively on their gold content, so issues like rarity and scarcity don’t factor into the cost. They also typically have the lowest “spread” between the price of gold and the physical product.
“If you’re looking at gold, step out of the moment and don't act on emotion,” Kamen said. “Think about both the entry point and, more importantly, an exit point.”
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