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April Fool’s Gold

The allure of gold has been around for centuries dating back to Ancient Egypt, the Roman Empire, gold rushes and the more recent gold boom of the 2000’s. Gold provides a sense of security for many investors, with the idea that possessing this asset during times of extreme volatility or recession will actually serve an alternative purpose. With the recent yield curve inversion and the widespread notion that a recession is imminent, gold and other precious metals are grabbing headlines. I can’t begin to tell you the number of times people have asked for my opinion on purchasing the precious commodity. Given today’s medium of exchange, my immediate response is always, “Why?!”

If we get to the point where our society reverts back to bartering physical goods as a means of payment, I’m afraid we have much bigger problems on our hands. If one day you wake up and need to retrieve the gold brick(s) tucked away in your safe in case of an emergency, odds are we have reached a state of zombie apocalypse; the financial system will have collapsed; and any dollar you own is essentially worthless! This notion that gold is a means of inflation insurance, despite war or an economic collapse, is not 100% accurate. At such a juncture, that brick of gold is only worth what someone is willing to pay or accept for it, and the odds are the value at this point is just that – a brick. How quickly we forget about the Brown Bottom period from 1999 to 2001, when gold reserves were at its lowest at $282.40 per ounce following a 20-year bear market. However, who doesn’t want a pot of gold?

A Few Nuggets
Don’t get me wrong, owning gold can be very satisfying. As with any investment, there are risks and rewards. Gold, like commodities, is meant to be hedged against inflation, but more often than not the optimal way to gain exposure to it is through an Exchange Traded Fund (ETF) or mutual fund – a diversified basket rather than physically buying the hard gold itself. In late 2011, precious metals were at an all-time high, exercised as money safe havens and de facto values of cash. As concerns about our financial systems’ catastrophic collapse dissipated, the price of gold followed suit, shed its panic premium, and reverted back to its traditional supply versus demand relationship as a price determinant. When investing in gold, weigh the advantages and disadvantages.

Pros of Investing in Gold
Besides its shine and appeal, there are some major pros in adding gold to an investment portfolio.

    • Gold, like commodities, is a quality hedge against inflation. As inflation rises and erodes the value of the dollar, the underlying cost per ounce of gold in dollars rises as a result; compensating the owner of gold with more dollars for each ounce of gold.
    • Gold can be relatively easy to buy and sell. With numerous options for investors to choose from, in order to gain exposure (i.e. gold bullion, Golden Eagle Coins, mutual funds, ETFs, etc.), there are many avenues available in acquiring and marketing gold.
    • Geopolitical factors and economy fears tend to spike gold prices, presenting an opportunity to capitalize, making the upside potential for gold significant.
    • Gold could outvalue inflated currency.
    • Gold prospecting. Many times, finding gold is associated with finding other minerals associated with gold deposits that can pay handsomely.

Cons of Investing in Gold
Gold is an investment anyone can make, and its rate is tied to the international bullion market. As mentioned above, if our economy gets really bad, resorting to gold is useless if the dollar is so inflated that it loses purchasing power and we are swapping goods and services. Some cons of gold include:

    • Geopolitical factors and economy fears tend to spike gold prices, presenting an opportunity to capitalize. As I said, the upside potential for gold can be significant, but as fear dissipates, the sell-off can be more extreme than the gain.
    • Gold only earns when you sell it. there are no periodic cashflows like investing in stocks and bonds that pay a dividend or income stream.
    • Price appreciation is unclear, whereas investing in something like real estate and reinvesting rental income to earn more year-over-year.
    • Hidden Fees. There are tons of hidden fees when buying physical gold, such as dealers charging a premium for storage, transportation, testing and re-testing, verifying rare coins, insurance, etc.
    • Gold has large liquidation spreads. The type and/or amount of gold you buy will determine the spread or premium over the current spot price of gold one may see quoted online or in the paper, and that’s really based on liquidity. The largest premiums are typically associated with purchasing Golden Eagle Coins, as they carry the highest liquidity rate and don’t need to be re-tested. When buying and selling gold bullion, the gold must be re-tested every time (which carries an additional cost), that is unless you buy gold in one-kilogram increments. The larger the gold bars one buys, the smaller the premium. In other words, the cheapest way to buy physical gold (with respect to premium terms) is to buy one-kilogram bars, which, based on the current price of gold falling around $1,275 per ounce, is about $41,000, resulting in higher storage and transportation costs.

Gold is among one of the most unique metals, and the appeal of possessing it just in case is a real concern. People want to protect their wealth. If you and/or your clients decide to invest in gold, please consider the aforementioned factors, and buy from a reputable dealer or advisor. Educate yourself on the liquidity of your investment and the commission premiums. And remember, all that glistens is not gold.

Chris Osmond is the chief investment officer of Prime Capital Investment Advisors. Find him on Twitter @ChrisOsmondCFA. 

The preceding commentary is (1) the opinion of Chris Osmond and not necessarily the opinion of PCIA, (2) is for informational purposes only, and (3) should not be construed or acted upon as individualized investment advice. Past performance is no guarantee of future results. Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management (“PCWM”) and Qualified Plan Advisors (“QPA”).


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