Could investing in gold add a new dimension to portfolios?

Insights from Morgan Stanley Wealth Management

08/30/21

Summary: While gold isn’t a strategic asset class, there are certain reasons to consider adding exposure. See three ways to go about it.

After years of trading in a narrow range around $1,200 an ounce, gold jumped nearly 50% at the onset of the COVID-19 health crisis. Given low correlations with other asset classes, gold may have a role in a diversified portfolio as a hedge against potential market downturns. It can also serve as a hedge for economic risks—for example, the risk of a continued rise in inflation from the record stimulus pumped into the economy.1 If rates fall, inflation returns, or the US dollar weakens, gold could outperform.

Historically, gold has exhibited low correlation to stocks and an inverse relationship to the US dollar, meaning as the dollar weakens, gold prices tend to rise.

So how can investors add gold as a practical matter to their portfolios? Below are three main ways to get exposure:

  • Physical gold: The most obvious way to invest in gold may also be the most complex. Buying gold bars and coins—also called “bullion”—requires delivery and storage of the physical asset, which is often facilitated by a third party and subject to fees.
  • Stocks: Alternatively, investors can get exposure through stocks of companies that mine for gold. One thing to note is that gold-mining companies tend to be more volatile than physical gold. Typically, the mining sector correlates with the price of gold, but individual stocks may face company-specific risks.
  • Funds: Mutual funds and exchange-traded funds (ETFs) also offer investors exposure to gold—through baskets of securities that invest in gold-related assets. For the pure-play funds that own the metal, their value tracks the price of gold. The fund shoulders the cost of holding physical supply and passes it along to the investors in the expense ratio. Other funds might invest in multiple mining companies.

There are some drawbacks: Some gold funds are taxed as collectibles, so they don’t benefit from the lower long-term capital-gains rates for which stocks may qualify. Plus, they don’t produce any income, so the expense ratio can eat into principal every year.

Even within this small sector, choosing a fund requires some homework. Some funds own companies that mine different types of precious metals; some funds are global, and others own only small- and mid-capitalization mining companies. It’s important to read the fund’s prospectus to make sure it aligns with an investor’s individual risk tolerance and asset allocation goals.

Implementing a hedge

While some investors might aim to reduce their allocation to equities if the odds of a US recession rise, using gold as a buffer may be another approach to consider. Historically, gold prices tend to rise when bond yields, adjusted for inflation, fall. Conversely, a stronger dollar and rising yields, driven by improved global growth, would likely limit gold’s upside.

 

The source of this Morgan Stanley article, Could Investing in Gold Add a New Dimension to Your Portfolio?, was originally published on July 14, 2021.

 

  1. Morgan Stanley Wealth Management Global Investment Office Market Research & Strategy Team, “Is there an argument for gold?” June 30, 2021

Disclosures:

The prices of gold and other precious metals and the prices of securities in which performance is linked to the price of gold and other precious metals have been subject to substantial fluctuations over short periods of time. They may be adversely affected by unpredictable monetary and political developments, such as currency devaluations or revolutions, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries.

Commodities are assets that have tangible properties, such as oil, metals, and agricultural products. Investments in commodities and commodity-linked securities may be affected by overall market movements; changes in interest rates; and other factors, such as weather, disease, embargoes, and international economic and political developments; as well as by the trading activity of speculators and arbitrageurs in the underlying commodities. Investments in commodities or commodity-linked securities may not be suitable for all investors.

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