Gold

There I was, minding my own business, on the couch watching Shark Tank re-runs on CNBC, when a commercial pops up with none other than Hall of Fame Quarterback Joe Montana telling me about the viability of Gold in an IRA. 

These ads are common these days, and if you can't trust a pro football quarterback to give solid advice about asset allocation, who can you trust?

....Well, me, for one.

Now, this is just one kind of ad I've seen lately for gold, but there have been A LOT. I'm sure you've seen them. In fact, interest in gold is particularly high as a result of the recent spending in congress and the worry about inflation or debasement of the USD. 

Thus, below are my thoughts on investing in metals (not just gold): 

Most of us know we should diversify, although we aren't always clear on how to do it. Sometimes the financial press (or Joe Montana) recommends holding precious metals and gold in a portfolio, and there may be some merit to this idea. But which precious metals should you own, in what form, and how much?

There are (arguably) only a few basic assets that we often break down into much more specific investment types when building a long-term portfolio. These include stocks, bonds, cash, real estate, and commodities. There can be a lot of overlap in how a particular investment behaves, depending on how it is being used for production or investment. Different kinds of metals behave differently for this reason.

In general, the average person is not going to trade in the futures market to get metals exposure. Our choices tend to include holding the physical metals in the form of bars, coins, jewelry, (or the silverware you stole from your niece's wedding reception), stocks or funds in mining companies, or funds which hold metals. We'll dig into each of these briefly after a quick overview of metals in general.

Silver, platinum, palladium, and copper are utility metals used to manufacture finished goods. For example, silver used to be a major input for making photographic film, but today, it's used in electronics for its conductivity. It can also serve as a sort of "poor man's gold," meaning that it could be viewed as an eventual substitute for fiat money(US Dollars).  Copper goes into wires and pipes. Rare metals are used in various advanced electronics, including smart phones.

There's an element to investing in metals where you may say "I think the utility of this metal will be needed in the future and the price will go up." You may remember several years back when we saw huge increases in the price of copper such that people were regularly stealing copper wire and pipes from construction sites and trading it for cash -- this is what happened; the use of the actual metal became valuable to exchange for dollars.

You'll notice that gold was left out of the above list of Utility Metals. That's because gold mostly serves only as a store of value. Gold doesn't pay a dividend, generally isn't consumed, and subjects its owner to storage costs. Whenever the stock market is particularly volatile, or fears of inflation pick up, we start seeing TV ads (on stations popular with certain older demographics) promoting gold coins. The advertisers know that retirees are very sensitive to their accumulated wealth and are keen to protect what they've saved, so pitching gold as a safe haven represents a winning strategy for getting investor dollars. If you're a retiree, these advertisers know where to find you and they are good at what they do -- this blog is intended to help add the counter-argument to that sensationalism. 

Okay, back to how you can think about metals.

I spoke with an old friend the other day who put it eloquently when he said "it would be pretty sweet to have some gold bars."  

Yea, it would be "pretty sweet." ...It feels good to hold actual gold or silver coins or bars in your hands.

But other than that feeling, what is the merit?

How does it fit into the framework of the decisions you make with money in pursuit of the things you want? 

How will you justify the holding costs at a bank or trust institution? 

Is there a better alternative use of capital? 

In addition to the fact that the price could go down after you buy it, gold carries risks includingL touching your "proof" coins and marring their value (scratch the counting house idea), losing them, or having them stolen from the jar buried in your back yard. You might even accidentally eat your gold if someone in your home has been watching too many food shows (here's a link for edible gold sheets if you're interested).

If you want to exchange your gold for stuff, then you probably need to convert to cash. When you need cash, you have to find a dealer, and that dealer may or may not offer you the best price. The condition of your metals also affects the value. So whatever price you are seeing in the paper or online is only an estimate of what your investment is worth.

If you're predicting an environment where dollars are not the medium of exchange because we're in some kind of apocalyptic situation, then I'd recommend considering whether gold has an advantage as a store of value over some other item or commodity people might find more useful (canned food, ammunition, shelter, etc.).

As an investment, I'm not as big a fan of gold. I like my investments to create value while we hold them. 

Stocks create value for owners by paying out dividends. 

Bonds create value for owners by paying interest. 

Real estate creates value for owners by paying rent. 

You might say, "What about stocks which don't pay dividends, like Amazon?" If a stock isn't paying a dividend, it's presumably reinvesting earnings back into the company so that it has more command over the market, which can secure a higher or more secure potential dividend in the future.

If you want to buy an income-producing asset that provides varied exposure to metals, it could be worth considering mining company stock. Mining companies do often pay dividends so that your money isn't completely idle, and they can make adjustments to their operations when the price goes down so they can moderate the hit. But stocks move along with the stock market and are not a pure play on precious metals. I've always liked the saying, When there's a gold rush, sell shovels... I think this sums it up pretty well for me. 

Around 2004, it became possible for the standard retail investor to hold a direct interest in gold with the launch of the world's first gold exchange-traded fund, which was just a paper representation of gold held in a vault somewhere. Other metals funds were developed shortly thereafter.

With funds, the storage costs and management fees are taken directly out of the share price over time, and the investor never sees the actual gold, so you can't exchange it for a beaver pelt or something if you want the funds available for a dystopian existence. But the funds are easy to trade and costs are relatively low. Again, if the world falls apart, you won't be able to cash your ETF for a sack of gold coins, so this is where it gets really important to be clear about what the purpose for the gold actually is. 

So what's my view? 

In the case of gold (or Bitcoin or trading cards, for that matter), here's how you make money: 

Step 1: Buy gold from someone for a price you think is good (sheesh, what a sucker that guy was for selling you the gold at that price, right?).

Step 2: Price goes up and you sell it to someone else (sheesh, what a sucker that gal was for buying that gold from you at that price, right?) 

Harding Wealth doesn't generally recommend commodities exposure because of our preference for assets that deliver value while they're held even if the price doesn't go up (yield, rent, dividends). 

But you know what's more important than my investment beliefs?

Sleeping well at night, that's what. If some gold helps that happen, I'm all for it. Just as long as the amount is moderated and it fits in with your overall picture. 

After all, these aren't just investments, they're investments owned by people. We all can grant ourselves the grace and flexibility to buy things that make us feel a certain way... 

Sometimes it's pretty sweet to own something even if it's not perfectly aligned with your investment principles. 

That's all for now. 

Onward, 

Adam Harding, CFP