If you’ve watched TV or listened to the radio recently, you’ve probably heard an advertisement about investing in gold. Is gold really a good investment?
In this Q&A session, Beacon Wealth Consultants’ Hillary Sunderland and Cassandra Laymon answer some common question about investing in gold including:
- What are the key challenges of investing in gold?
- With these challenges in mind, why are some investors so keen on investing in gold?
- Do you believe that gold is a good inflation hedge?
- Should you buy gold to protect against a decline in the value of the U.S. dollar?
- Do we typically allocate to gold in the LightPoint Portfolios?
Watch the video to learn more!
Transcript
Cassie Laymon:
Hillary, it’s been a little while since we’ve been together for a Q&A session, and I have some questions for you. I have just spent the last couple of weeks with my parents and we were watching the news all day long, and it was interesting because as you’re watching the news all day long, the advertisements were all about gold.
And we get a lot of questions from people about gold and investing in that, and I could see why – it seems really appealing if you’re watching that all day long, it looks like a very appealing investment. So I wanted to on behalf of our clients, ask you some questions today about investing in gold. And let’s just start off with a very basic one. Is gold a good investment?
Hillary Sunderland:
It is a great question. Investors buy gold for a variety of reasons. Usually when you’re seeing commercials about gold on the news, it’s to hedge some type of risk such as inflation or a decline in the value of the US dollar. So there are a lot of reasons why that’s presented to investors on tv, but there are some key challenges with investing in gold.
One is that there’s no income stream that comes from gold. There’s no dividend that you earn or interest rate that you earn like you typically do on other investments. And so the price of gold is simply based on supply and demand dynamics in the market. And when it’s just based on supply and demand, that means it can be more of a speculative investment and it can be pretty volatile in terms of its price. So there are some challenges around that.
Additionally, I would say one of the bigger challenges with investing in gold is how it’s taxed. So it’s taxed as a collectible, which is a much higher rate than what you would get in terms of capital gains taxes on other types of assets such as stocks, and the fact that this taxes as a collectible can significantly reduce returns that investors receive if they invest in this particular asset class.
Cassie:
So you talked about some key challenges here, and with all of that in mind, why do you think people are still so interested in investing in gold?
Hillary:
Well, I think a lot of people are still concerned about inflation in particular. That’s one of the biggest reasons I hear that people are interested in investing in gold.
One of the interesting things though is when you look historically at how well gold actually hedges inflation, the track record there is a bit mixed. And so when you look at different asset classes you could use to hedge an increase in inflation, there are really three different areas we think about targeting. One is treasury inflation protected securities or TIPS. One is investing in natural resource stocks themselves. So those are companies that are involved in actually producing commodities and then there is gold.
When you look at those historically, we actually find that the highest correlation to hedging inflation comes from investing in natural resource stocks and then from TIPS and then from gold. And so when I’m thinking about it in terms of investing for our clients, there are usually better ways to hedge a rise in inflation than by investing in gold itself.
That’s why we’ve chosen to have both natural resources, stocks and treasury inflation protected securities in our portfolios, but we typically don’t hold gold for a couple of different reasons.
Cassie:
Very interesting. Now, another thing I think some people are concerned about when they’re thinking about investing in gold is they’re worried about the decline of a dollar. So there’s, hey, I’m a little concerned that the value of this currency will go down all the way to maybe I’m going to need to have gold to use as currency if something severe would happen. So how do you answer that question when people have this concern about the decline in the value of a dollar?
Hillary:
Yeah, that’s a really great question, Cassie. One that I hear often as well. So one thing to remember when you’re thinking about the US dollar and it being devalued versus other currencies is that currency investing itself is more of a zero sum game. Okay?
So for the US dollar to be significantly devalued versus other major world currencies such as the Euro or the Japanese Yen or the British Pound, you would also have to believe that economic growth in the US is also materially declining versus those other countries in areas of the world. And also that inflation is significantly worse here than in those other areas of the world. So when you think about it in that context, and it’s not just the value of the US dollar declines, but also it has to be materially different than all these other major world economies and currencies.
I think that changes your focus a bit. Now we do believe that the US dollar is likely to decline over the long term because of the fiscal deficits we’re running and some of the issues we’re seeing with the budget in the United States. But there are other ways that we seek to protect investors from decline in the value of the US dollars. And one of the easiest way to do that is to invest in international securities, which is a pretty large component of our portfolios.
One of the reasons why we invest in international securities is because you’re investing in foreign currencies. Whenever you’re buying companies domiciled abroad, and then when the US dollar declines versus those currencies and those returns are converted back into US dollars, you actually get an extra boost in return.
If you think back to the early two thousands when international securities vastly outpaced US securities in terms of return, a lot of that was due to that currency translation effect. And so we already have some of these ways to hedge a decline in the value US dollar embedded in our portfolios. And quite frankly, I think it’s a better way to do that than to put a lot of money in a fairly speculative investment that doesn’t get great tax treatment. This is a more direct way of doing it, and you’re investing in companies that are producing goods and services and then are paying dividends instead of in a security that whose prices purely determined based on supply and demand in the market.
Cassie:
I appreciate your insight on that. I know you touched on this earlier, but I just want to circle back to it and just ask you directly, do you invest in gold in the LightPoint Portfolios and can you just share a little bit about your thoughts about that?
Hillary:
Sure. So we typically don’t invest in gold within the portfolios, and that’s because as a student of economics, I usually think about investing in terms of opportunity costs. So if we were to take a slice of a client’s portfolio in investing in gold, that means we don’t have that capital available to invest elsewhere.
And like I’ve said throughout this question answer session, I have found over time that there are typically better ways to either hedge a rise in inflation or to protect against a decline in the value of the US dollar by targeting some other areas of the market that historically have actually given better returns with less risk than a direct investment in gold and also are taxed more efficiently as well. And so because we’re thinking about opportunity costs in the best ways to increase returns while reducing risks for investors, we typically find other ways to hedge out those sorts of risks in the portfolios.
Cassie:
Well, Hillary, I just want to say thank you to you and the investment team and the investment committee. I know I have a lot of comfort knowing that you are paying attention to this and many other issues around the assets that we’re investing in the portfolios. I hope that our clients also feel a lot of comfort just hearing your perspective about this.
So if you have further questions about gold or anything else, please feel free to reach out to your financial advisor or you can contact us at info@beaconwealth.com and we welcome your questions anytime. Thanks for your time today, Hillary.