Are you looking to include gold in your portfolio? Learn the different ways to invest in gold such as ETFs, stocks, futures, options, and physical gold. Learn the pros and cons.
Gold. It’s the yellow metal, the “barbarous relic,” but it’s also a medium of exchange that’s been respected as a store of value since ancient Egypt. It’s also an asset class that some investors might consider as part of a diversified portfolio.
But when it comes to investing in gold, there are many approaches, from direct purchase to investing in the companies that mine and produce the precious metal.
Gold has an emotional attachment that can make it different from other investments. When we exchange wedding vows, we exchange golden rings. In school, we learned of the “49ers” whom flocked to the West Coast during the California Gold Rush. And we’ve all heard the radio pitch telling us that empires were built on gold and how, on a long-enough timeline, gold will replace fiat currency as the chief unit of exchange.
Some advisors recommend gold as a way to add diversification to a traditional portfolio of stocks and bonds. Proponents such as the World Gold Council point to studies showing that an allocation of gold and other alternative assets, even though they can be risky in and of themselves, can actually raise the risk-adjusted return profile of a portfolio.
Why? One answer is gold’s low correlation to traditional assets, which proponents say can act as a hedge against systemic risk, especially during periods of stress in the stock and bond markets. Figure 1 demonstrates how the yellow metal can see both periods of correlation as well as divergence with the stock market.
But diversification alone shouldn’t be the basis for adding gold as an investment. Plus, there’s no guarantee that diversification will eliminate the risk of loss.
Bottom line: If you’re considering adding gold to your portfolio, you should look at it with the same care and consideration you give any of your financial decisions. And with that in mind, let’s look at some of the choices available for investing in gold. We’ll start where the ancient Egyptians did—with the physical metal.
Traditionally, ownership of the physical product—gold coins and bars—is the most common and straightforward way to invest in gold. Simply buy coins or bars from an online dealer, or from your local coin shop, and then put them away for safekeeping. But buying the physical metal is also the most inefficient way to own gold.
If you’re considering adding some of that glittery yellow metal to your portfolio, but you’re not sure where to start, consider using screeners. Here are two ways.
Markups and commissions on physical gold sales can be high, and depending on where you live, you may have to pay sales tax on the purchase as well. Uncle Sam collects when you sell your gold too. The IRS considers gold bullion and coins “collectibles,” which carry a 28% top federal tax rate on long-term capital gains. By comparison, stocks, bonds, and other investments have a max tax rate of 20% on long-term capital gains and up to 37% on short-term capital gains based on income level.
The storage of physical gold is also a problem. Are you willing to keep your gold at your home, where it may be at risk of theft, fire, or natural disasters? Some companies will offer to store your gold for you, and you can always get a safe-deposit box at the bank, but in both scenarios, you’ll be charged a fee and may not be able to access your gold if you need to sell it on short notice.
Gold-mining companies come in two different sizes: junior and major. Junior miners are companies that are newer or more speculative, often mining unproven claims and hoping to find a big score. Major miners are more established companies with production and infrastructure in place, mining on proven and sustainable claims. Both categories include a number of publicly held companies.
The theory behind buying mining stocks is that, as the price of gold goes up, the profit margins of the companies go up as well, which may be reflected in their stock prices. But the price of gold is only one component of the underlying value of these companies. Factors such as geopolitics, the cost of energy and labor, and even corporate governance can impact the profitability of individual mining firms but not necessarily the price of gold. As with any investment, it’s important to do your research before investing.
Exchange-traded products (ETPs), such as a gold exchange-traded fund (ETF) or exchange-traded note (ETN), can offer exposure to the precious metal, but not all ETPs are alike. Some involve physical ownership of the metal, while others use futures, options, and other investments to attempt to mirror the investment profile of owning gold. If you’re a TD Ameritrade client, you can learn more about the available ETPs by using screeners (see sidebar).
Before investing in an ETF, be sure to carefully consider the fund’s objectives, risks, charges, and expenses. For a prospectus containing this and other important information, contact us at 888-669-3900. Please read the prospectus carefully before investing.
When investing in gold via futures or options, you’re using leverage to control a larger amount of the commodity than you could with just the money you’re putting at risk. This can be an efficient way to participate in gold price fluctuations—up or down—depending on whether you’re bullish or bearish on the market.
Gold futures may respond to stock market volatility, and some investors migrate to them as a hedge when stocks become volatile. But it’s important to understand the different characteristics associated with the pricing of futures and options. Plus, leverage works both ways. It can turn a small amount of money into a large gain, but the reverse is also true—any losses are magnified as well as the potential to lose more than your initial investment.
Ultimately, if you’re looking to add gold to your portfolio, consider which products make sense and feel most comfortable for you.