Gold's shining bright in 2016, but don't let that blind you
London (July 28) You’ve seen the ads for gold in your Internet browser or during commercial breaks on cable news. “Gold is the ultimate safe haven,” they claim, or “Gold is the only true currency in the world.”
And in a year like this one, those marketing messages seem to add up. After all, gold prices are up more than 25% so far in 2016 amid plenty of uncertainty — including, most recently, the United Kingdom’s groundbreaking Brexit vote to leave the European Union, which has thrown the economic alliance and its shared currency into turmoil.
But is gold really a must-own investment in 2016, or just a glittery fad?
“The mystique around gold can get a little kooky, actually resembling a fundamentalist religion. 'Gold is the one true currency' is something I hear often, and I roll my eyes every time,” says Charles Sizemore, principal of Sizemore Capital Management in Dallas. “Gold is just a commodity like any other. It’s better suited as a store of value than, say, cattle or corn, because it is imperishable. But it’s still just a shiny metal.”
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David Fabian, managing partner of FMD Capital Management in Irvine, Calif., agrees.
“The No. 1 myth is that gold is somehow an ever-present store of value,” Fabian says. “It fluctuates just as much as stocks or any other asset class does.”
In fact, he says his firm currently isn’t recommending gold to clients as part of their portfolio right now in spite of its recent momentum.
“It doesn’t fit in with our more conservative positioning at the moment,” Fabian says, adding, “I prefer not to try and chase it after the 25% run it has had this year.”
Experts: Gold is a tactical trade — not a long-term one
Despite the ever-present marketing hype, a quick look at historical gold prices will give investors a clear window into its fluctuations and risks.
Consider that compared with August 2011 — when it topped out at almost $1,900 an ounce — gold today is about 30% lower. In the same period, meanwhile, the S&P 500 is about 80% higher.
Worse, history shows that gold can take quite a long time to regain its previous highs. For instance, after gold peaked at around $500 in 1987, it slid pretty steadily to a low of $330 by 1993 and didn’t reclaim the $500 mark until 2005 — almost two decades later!
Since 1926, the inflation-adjusted annual return for a gold investment is just 1.4%, says Zack Shepard, vice president of Ohio investment advisory firm Matson Money. For stocks, the average annual return in that same 90-year period is about 6.7%.
“After you factor in taxes and commissions for gold, you are looking at an abysmal long-term investment,” Shepard says. “Gold has historically been a dramatically worse long-term investment than stocks.”
Sizemore acknowledges gold’s long-term underperformance but says the precious metal still can serve a useful purpose for investors making more tactical trades — say, those hedging against the risk of inflation or looking for an alternative investment to stocks in the very short term.
“I say this mostly joking, but I consider gold a little like a handgun,” Sizemore says. “It’s something that is good to have, just in case. But you hope you never have to use it.”
What’s the best way to buy gold?
If you understand the risks and want to make a responsible investment in gold, there are several ways to buy the precious metal, including gold coins, bars or gold-backed investment funds you can own in an IRA or other investment portfolios.
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However, Fabian says gold bars and coins are not appropriate for tactical or short-term gold investors.
“The process of buying, storing and protecting physical gold is onerous unless you are intimately familiar with that market or plan on holding for the long term,” Fabian says. After all, it’s not like you can just carry a 400-ounce bar of gold in your pocket or use it to buy groceries at the supermarket if you run out of ready cash.
Instead, Fabian recommends investments like the SPDR Gold Trust ETF (GLD) or the iShares Gold Trust (IAU) because they are “liquid” and easy to buy and sell as you see fit. While these investment funds do charge a small annual fee — about $25 each year on $10,000 invested for IAU and about $40 for GLD — those expenses are significantly lower than buying a safe or paying commissions or markups to coin dealers, he says.
But whatever investment method you choose, above all else, Shepard warns investors to stay rational and dispassionate in the face of what can be very aggressive marketing.
“The main way I have seen gold sold is as a fear tactic, involving a prediction touting ‘economic Armageddon’ being just around the corner,” Shepard says. “It’s a shame that many buy into that fear, because my experience is that it not only can destroy wealth, but living in scarcity is a destructive life mindset.”