If you decide to buy gold as a hedge against inflation there are several options. One can invest in gold through mutual funds, exchange traded funds (ETF), gold bullion, gold coins, gold mining stock and gold futures. In selecting an investment vehicle keep in mind your reason for purchasing gold – it’s a doomsday investment. If the entire financial world is crumbling around you, your gold needs to be secure. If you buy gold, consider investment in gold coins. Some options include the American Eagle, the Vienna Philharmonic or the Canadian Maple Leaf. With gold coins you have possession, they come in commonly accepted denominations and they are portable.
An exchange traded fund (ETF) may seem like a convenient way to buy gold. However, when you purchase an ETF, you own shares in the ETF, you don’t have physical possession of the gold. If you decide to purchase a gold ETF make sure the company has gold reserves to cover 100% of the investor deposits. Some of the largest ETFs have recently come under scrutiny for this issue. Finally, be cautious with investments in gold mutual funds, gold mining shares and ETFs that may become inaccessible in times of extreme market distress or collapse.
Jane M. Young CFP, EA, CDFA
I have frequently been asked about the wisdom of investing in gold to hedge against inflation. Generally gold is not a great investment, it is commonly thought of as a doomsday investment. Gold is very risky and exceptionally volatile. The value of gold is based on what people are willing to pay. The market value of gold can be highly dependent on irrational emotions. Over long periods of time the return on gold has mirrored that of inflation resulting in a real return close to zero. The current price of gold is exceptionally high; it increased almost 60% over the three years ending in 2008. Additionally, the cost to acquire and sell gold can be prohibitive.
Recent increases in government spending make inflation a greater threat. A threat of inflation makes gold more appealing. Gold usually holds its value at times when other assets are losing their value. The demand for gold generally spikes in times of economic instability and inflation. If the government becomes unable to sell treasuries to cover significant increases in government spending it will resort to printing money. This will result in inflation. Historically, inflation has lead to higher gold prices.
If you decide to reinforce your portfolio with gold to guard against inflation or economic instability it should only represent a small percentage of your portfolio – generally 5% and no more than 15%.