Gold is regaining attention as a portfolio diversifier and hedge against traditional investments, especially after the March stock market sell-off.
Although gold has been a financial instrument for millennia, the metal remains misunderstood by financial advisors and others, some market observers say. Chuck Self, chief investment officer at iSectors, a financial advisory firm, says in some academic programs, such as the chartered financial analyst or certified financial planner program, gold is often dismissed as an asset that doesn’t have economic use.
“But the reality is, it’s hard to find another asset class that has zero correlation to both equities and fixed income and that’s very liquid,” he says.
It’s easier than ever to hold gold in a portfolio, whether it’s gold equities, gold-backed exchange-traded funds or holding physical metal in a self-directed individual retirement account. And, like any investment vehicle, holding gold has pros and cons.
Tom Essaye, founder and president of Sevens Report Research, says gold’s lack of correlation with traditional investments is what makes the yellow metal a good hedge. “That’s been proven out over years and years of research,” Essaye says. “And it’s proven its worth in this environment.”
Gold is generally uncorrelated from stocks and bonds because it’s not used in industry, unlike other metals. Gold is mostly used for jewelry, with investment demand the second-largest use category.
Essaye says there’s also a psychological aspect to gold. “Some people like having that perceived safety net, and I think that’s a really good marketing point for clients, especially with advisors. Gold can be a very strong crisis hedge,” he says.
Self says gold sits in the alternatives sleeve of a portfolio, and he prefers it to other portfolio alternatives such as private equity. Not only can the yellow metal can be used strategically or tactically, but the market is liquid and it’s inexpensive to hold, unlike other expensive alternatives that have lengthy lockup periods.
“You can get a gold ETF with an expense ratio as low as 17 basis points,” he says.
The World Gold Council, an industry group, says in 2019, gold’s traded volume averaged $145 billion daily, similar to the average daily trading volume for the S&P 500 and one-to-three-year U.S. Treasury notes.
Gold equities and gold ETFs are the easiest ways to own gold. Self says he uses gold equities tactically. Gold-miner shares benefit when the metal’s value rises, which pushes up stock prices, making the shares a leverage bet on the gold price. Gold-backed ETFs track spot gold prices using physical gold held in vaults. Self says these are more useful as strategic positions.
A common rule-of-thumb is to have 5% to 10% allocated to gold, Essaye says, depending on a person’s risk tolerance, although Self says he’s used between 10% and 15%.