Assuming investors do want to jump on the gold train, what options do they have?
One way is to simply buy gold in the form of bars or coins. Some investors prefer this, says Niladri Mukherjee, managing director at Merrill Lynch Wealth Management, because they like to be able to see and touch the asset. Some of these investors may have a particularly bearish outlook on the economy, he says, and view holding physical gold as safer than investing in a fund that owns gold or the shares of gold miners. Others may conclude that gold-related financial products and their issuers are too complex, he says.
But owning gold this way can be costly, Mr. Mukherjee says, because, to be safe, investors who buy gold bars or coins have to pay for secure storage and insurance.
Another method is to invest in a fund that owns gold. The easiest way to do this is to buy shares of an exchange-traded fund that holds the metal, says Mr. Mukherjee. Kiril Nikolaev, an analyst at ETFdb.com, a website that covers the ETF market, points out that gold ETFs generally charge investors lower fees than mutual funds.
However, gold ETFs also have their drawbacks. Investors’ gains from funds that hold gold are taxed at the rate for collectibles, meaning a maximum of 28%, says David Perlman, ETF sector strategist at UBS. One way to avoid this, while still having exposure to the metal, would be to invest in equities—buying shares of gold miners, either individually or through a fund. Gains on these shares are taxed as long-term capital gains if the shares are held for more than a year, at a maximum of 20%, “so there could be an advantage,” Mr. Perlman says.
Miners’ shares have soared this year. However, this option leaves investors exposed not just to gold but also to the stock market.
“About half the movement of a gold miner is typically to do with the price of gold, and the other half is due to the stock market,” says John LaForge, head of real-asset strategy at Wells Fargo Investment Institute. “So you are making a bet on the stock market, whether you want to or not, when you own a gold miner.”
If you view gold “as a shock absorber if we get into a weaker environment [for stocks], then you’d rather go with the metal directly as opposed to the miners,” says Mr. Perlman.
Regardless of which approach investors choose, Mr. Mukherjee advises them to have a disciplined rebalancing plan, so that an increase in gold prices doesn’t push their holdings to a percentage of their portfolio that exceeds their risk tolerance.
Ultimately, there are no hard and fast rules with gold, says Mr. Mukherjee. The amount to buy depends on the individual investor. “How much you should have depends on the specific goals of the client, on the risks that the client is willing to take, and on what other kind of diversifying instruments and assets the client has in their portfolio,” he says.
More about:
