Could Investing in Gold Add a New Dimension to Your Portfolio?

Gold has been trading over $1,700 an ounce for the last year, after years of trading in a tight range around $1,200 an ounce. Gold may also play a part in a diversified portfolio as a buffer against possible downturns due to its low correlations with other asset classes. Given the ongoing risk of a possible increase in inflation as a result of the unprecedented stimulus pushed into the economy, it may also act as a smart allocation and hedging. 1 Gold may gain if interest rates fall, inflation rises, or the US currency weakens.

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Gold has always had a poor connection with stocks and an inverse association with the dollar.

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“The US dollar’s current drop may continue,” says Morgan Stanley Wealth Management’s Chief Investment Officer Lisa Shalett. “When the dollar falls in value, it may be a good moment for some investors to consider adding gold to their portfolios.”

Other reasons to consider investing in gold at this time, according to Nicholas Thompson, who handles Morgan Stanley’s physical precious metals portfolio for Wealth Management customers. “Gold bars and coins are often sold at a modest premium to the current price” (i.e., the gold price quoted on the exchange). This premium varies depending on market circumstances, and it might rise when the supply chain, refinery capacity, or transportation availability are disrupted. During times of increasing uncertainty, increased demand for physical bars and coins, along with supply problems, may drive up the cost of acquiring these items, as observed during the COVID-19 crisis.

Because wealthy countries are issuing so much debt with negative yields2 and the Federal Reserve is expected to keep interest rates low until 2022, “the cost of holding gold has become cheaper than owning high-quality sovereign debt in certain situations,” Thompson says. These market circumstances may be driving up worldwide gold demand.

How can investors include gold into their portfolios in a realistic way? There are three basic strategies to get exposure listed below:

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Gold in its physical form: Gold bars and coins may be purchased via Morgan Stanley’s brokerage account, and gold-minted American Eagle coins can be purchased through their retirement account. Investors may have to pay a premium above gold’s current price. Morgan Stanley does not have actual possession of the gold. Typically, there are storage costs. If investors wish to store their gold personally, they may take delivery of actual gold. Delivery costs would apply in such circumstances.
“Some high-net-worth customers may desire something physical to diversify their investing portfolios away from book-entry securities, which often dominate their portfolios,” Thompson adds. “It’s one of the few investments that customers can have in their hands, and it may be used as a means of exchange in certain situations.”

The following are gold funds that possess the metal: Gold is also available via several mutual funds and exchange-traded funds. The value of pure-play investors follows the price of gold. The fund bears the cost of storing physical inventory and passes it on to investors as part of the expense ratio.
There are various disadvantages: Because certain gold funds are classified as collectibles, they are not eligible for the reduced long-term capital gains rates that apply to equities. They also don’t generate any revenue, so the cost ratio may eat away at the principle year after year.

Mining firms: Investors may get exposure to gold mining companies by purchasing individual stocks or participating in a mutual fund.
“Mining firms are more volatile than real gold,” argues Michael Jabara of Wealth Management’s fund due diligence division. The mining industry typically tracks the price of gold, but individual equities may suffer company-specific risks, according to Jabara.

Even within this tiny industry, selecting a fund may be difficult. Some funds hold firms that mine a variety of precious metals; others are worldwide, while others solely own small and mid-cap mining companies. Investors may be unsure which is best for their risk appetite and asset allocation strategy. Jabara’s experts often collaborate with Financial Advisors to assist customers in selecting gold and precious metals ETFs.

Putting a Hedge in Place

“Some investors may believe that if the prospects of a U.S. recession grow, they should cut their stocks exposure, but purchasing gold as a buffer is another option to consider,” Shalett adds. Gold prices have historically risen when inflation-adjusted bond rates have fallen. A stronger currency and higher rates, fueled by greater global growth, would, on the other hand, certainly restrict gold’s upward potential.

While gold isn’t often thought of as a long-term strategic investment, it may be worth considering for certain individuals as part of a diversified portfolio.

Contact your Morgan Stanley Financial Advisor to learn more about gold coins, bars, and ETFs, as well as which vehicles could be appropriate for your portfolio.

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