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In September, gold reached an all-time, perhaps fueled by concerns surrounding the US-China Trade War and the quandary of the global economy heading towards a definitive recession. For those investors interested in gaining exposure to the precious metal as a hedge, one investment tool, which increasingly is available are gold funds. A gold fund is either a mutual fund or exchange-traded fund (ETF) that invests in gold-producing companies, or gold bullion. Although both give investors a convenient way to diversify portfolios with the precious metal, it is important to understand the distinction between the two investment options.
For the purposes of this article, we’ll focus on gold mutual funds. Referred to specifically as Gold Mining Funds, these funds do not invest in physical gold, but rather, usually hold stocks of companies that are involved in the gold industry. As the fund’s name suggests, that can mean gold mining companies, but also includes companies involved in gold jewelry manufacturing or gold wholesalers, amongst others. In essence, the returns on gold mutual funds are dependent on the performance of the companies. Likewise, the actual price of gold will directly affect returns on gold mutual funds based upon its value on the open market. Thus, a slight fluctuation in the value of gold will either increase or decrease a company’s profits, which ultimately, influences the performance of gold mutual funds.
In this article, 4 financial experts weigh in on whether gold mutual funds are a good or bad investment choice.
No More Than 5% To 10% Of A Portfolio In Gold
“Overall they're ok. Many people use gold as a hedge against the market. Don't put more than 5% to 10% of a portfolio in gold. If you're looking to hedge, coins or bullion are superior options.
The advantage of gold mutual funds is daily liquidity if you want to sell out. The downside to them is the fees.”
Chane Steiner, CEO, Crediful
The Biggest Drawback Is That Gold Doesn't Generate Dividends Like Traditional Mutual Funds
“I believe in diversification that results in positive asset balance when it comes to saving for retirement. Gold as an investment medium has been a topic of discussion for as long as I can remember. The biggest drawback is that the metal doesn't generate dividends like traditional mutual funds. The only considerations are: That, over time, gold will appreciate (thus creating a selling opportunity). Even more important, gold will hold its value when those of other assets are falling. In other words, it's a hedge. From personal observation, it's clear that ignoring gold as a percentage of one's portfolio (up to 20% but not less than 10%) is unwise. Every first-world nation holds gold reserves, and that's an exemplary example everyone can see. If it's good for the USA, Germany, Switzerland, and the like, it's suitable for my portfolio and retirement plan. Another recession is coming – that's a certainty. I don't know when, but it's coming. I expect that my gold holdings will more than hold their own when it happens.”
Gordon Polovin, Finance Expert, Serves on the Advisory Board for Wealthy Living Today
You Should Also Try To Put A Small Percentage Of Your Net Worth Into Physical Gold
“Gold mutual funds can be a good addition to a portfolio, however, if you are invested in one you should also try to put a small percentage of your net worth into physical gold to have physical gold that is worth something in addition to your mutual fund. Anything can happen in the stock market and in a volatile market your mutual fund could lose all value, however, your physical gold will still be there and will most likely still have some value.”
Stacy Caprio, Financial Blogger, Fiscal Nerd
If You Have A Long Time Horizon You Should Not Invest In Precious Metals
“If you have a long time horizon you should not invest in precious metals, as the long-term returns are far below those of equities. At the end 1925, the price of an ounce of gold was $20.63. At the end of 2018, an ounce of gold sold for $1283.10. Over that 93-year period, the precious metal returned 4.54% compounded annually. Over that same time period, according to Ibbotson Associates, the compound annual rate of return of a diversified portfolio of large stocks (the S&P 500) was 10%. That same $20.63 invested in gold at the end of 1925 would have grown to $145,888 if invested in the S&P 500. Investing in a diversified basket of small stocks provides even greater returns. The compound annual rate of return of a basket of small stocks over that 93-year period according to Ibbotson Associates was 11.8%. That same $20.63 would have grown to $660,065 at the end of 2018. The overall return to gold was less than 1% the return to a diversified basket of common stocks.
While having a small position in precious metals may dampen portfolio volatility in the short-run, the tradeoff between slightly dampened volatility and the lost long-term return is certainly not a prudent one.
Gold and silver are speculative investments, based on the Greater Fool Theory. The price of gold is not determined by its intrinsic value but simply by its expected selling price to someone in the future. But, don’t listen to me, listen to Warren Buffett who in 2011 when meeting with students at the CFA Institute Research Challenge explained his rationale concerning gold as an investment as follows: “The world’s gold stock is about 170,000 metric tons, which if melded together could create a cube of about 68 feet per side; the cube would be worth about $9.6 trillion. For that much money, one could buy all the crop land in the United States, purchase 16 Exxon Mobils, and have about $1 trillion of walking around money left over.” He asked the students, which one they would rather have. He also noted, “You can fondle the cube, but it will not respond.”
Robert Johnson, Professor of Finance, Heider College of Business, Creighton University
Gold has long been regarded as a safe haven for investments during times of economic volatility. However, it is important to note that if you choose gold mutual funds to diversify your portfolio, that you are aware the investment tool is not investing in gold itself. Rather, these vehicles are typically investing in companies that mine the precious metal. There are a myriad of components that will contribute to the overall performance of the fund, principally connected to the performance of the companies. Not only does the global price of gold affect the profit of a company (in turn, affecting returns of the gold mutual fund), additionally, the investment tool is vulnerable to the actual management of the company, itself. This factor can potentially have a greater impact on the performance of a gold mutual fund, more so than the fluctuation of the precious metal.
There are advantages and drawbacks to any investment, and gold mutual funds are no exception to that sentiment. The price of gold is volatile and can fluctuate dramatically, coupled with the overall performance of the companies involved in the gold industry, which directly influences the performance of the fund. If you are interested in investing in gold mutual funds, it is crucial to do your due diligence, take into account what these financial experts have discussed, and consult a financial professional.