BY SUZANNE HAZLETT, MBA, CIMA®, CFP®
The price of gold reached a record high this month, peaking as the S&P 500 Stock Index crossed 5,000 for the first time.
Investors generally consider gold a haven in times of economic and political uncertainty because it frequently performs well when global markets are volatile. Those considering allocating to gold within their portfolios may gain exposure through gold equities, primarily mining and royalty companies, or gold bullion. Adding modest amounts of gold-oriented investments may help portfolios boost risk-adjusted returns, as these investments can dampen portfolio volatility and provide a buffer during periods of financial market stress.
While investing in gold offers portfolio diversification opportunities and serves as a potential hedge against extreme market events, several factors may drive the price of gold, including inflation, deflation, currencies, credit spreads, and interest rates. Understanding these drivers and the risks associated with investing in gold equities instead of gold bullion can help determine if and how to include gold within a portfolio.
Gold can be added to portfolios by acquiring gold equities, primarily mining and royalty companies, or gold bullion. Several mutual funds and ETFs invest in mining and royalty companies, while some ETFs solely offer physical gold exposure. Considering the gold market environment may help determine which approach is best suited. The price of gold positively correlates to the growth in the money supply, with a negative correlation to the strength of the U.S. dollar.
If markets are bearish on gold’s price, investors seeking to allocate to gold may consider gold bullion. Gold bullion will carry less volatility relative to gold equities and act as a potential store of value. Alternatively, if markets are bullish on the price of gold, investors may reap more benefits from a more significant allocation to gold equities than the bullion itself.
CONCLUSION: Returns for physical gold and gold miners may vary with the stage of the gold cycle. Adding modest amounts of physical gold or gold miners to a basic, diversified portfolio may boost risk-adjusted returns when substituted as part of the portfolio’s domestic or foreign equity allocation. Whether or not to include gold in a portfolio should be based on personal investing preferences and financial goals.
Suzanne Hazlett, MBA, CIMA®, CFP®, is a Certified Investment Management Analyst® and CERTIFIED FINANCIAL PLANNERTM professional. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Securities are offered through Raymond James Financial Services, Inc., member FINRA/SIPC. HAZLETT WEALTH MANAGEMENT, LLC is independent of Raymond James and is not a registered broker/dealer. 675 Sun Valley Road, Suite J1 + J2, Ketchum, Idaho, 83340 208.726.0605 HazlettWealthManagement.com