Gold Rush


It will never be said that old Elihu is a “gold bug” but in times like these, one should be thinking about putting at least some percentage of their portfolio in this commodity. Who could have guessed that market and geopolitical events would have unfolded the way they have? To recap, in recent months we have experienced another terrorist attack in the subways of London and demonstrations by the far right and counter-demonstrations in Charlottesville, Virginia, while North Korea continues its reckless activities in Asia. The United States equity and fixed income markets continue to perform nicely, but concerns have crept into the market. The VIX Index, which is a measure of expected volatility, has swung wildly over the past 30 days.

Market experts suggest that somewhere between 3 percent and 10 percent of an individual’s investable assets should be held in gold as a hedge against unpredictable events and inflations. It is of interest that this year a broad market rally has provided a tide that is raising all ships, but it is notable that gold is up 16 percent through Sept. 1.

Like all commodities, the price of gold is driven by the economic law of supply and demand. But unlike most commodities, gold prices are affected by savings and disposal, not consumption. In fact, most of the gold that has been mined still exists today and can easily be converted into cash, usually through the sale of jewelry or bullion. And unlike other commodities like oil, the price of gold is driven by market sentiment rather than annual production.

So what are the various means of investing in gold?

The first thing that comes to my wife’s mind is jewelry. As a gift, jewelry can score you some points, but it also generally comes with a design premium. It has also been my experience that it rarely becomes available to trade as gold prices fluctuate.  Purely from a portfolio management perspective, I would avoid investing in jewelry and not count on it in your portfolio.

Another investment option — and one commonly favored by individuals — is coins. Now it is important to differentiate between bullion coins, such as the American Eagle or South African Krugerrand, and numismatic coins which are priced on supply and demand as well as rarity and condition. Bullion coins range in size, with the 1-ounce size being the most popular and readily available.

Bullion bars are really the most traditional way of investing in gold. While rare in the U.S., bullion bars are available in most banks in countries like Canada and Switzerland and usually carry a lower price premium compared to coins. If you decide to invest in gold bullion bars, make sure to get a London Bullion Market certification, which tracks the bars’ “traceable chain of custody” from the time the gold was refined until it is delivered into your custodian’s hands.

Of course, more modern methods of owning gold are available. The first gold exchange-traded fund — carrying the symbol GOLD — was launched in March 2003. Today, traders and long-term investors can invest in any number of EFTs, as well as exchange-traded notes and or closed-end funds that are traded on all the major stock exchanges. There also are a number of gold mining companies who share trade activity in the equity markets.

Gold can also be held in what are known as gold certificates, giving the owner either an interest in specific gold reserves or in a percentage of the total reserves. In the past, it was common for banks to issue gold certificates, though the practice has died off. For the most adventuresome investor, the New York Commodities Exchange also provides ample opportunities to “play” the volatile gold market with derivatives.

In closing I’d like to caution all my readers that while gold has a place in almost every portfolio, there is both a possible upside as well as a possible downside — as in every investment — and it is best to seek the advice of investment professionals prior to taking the plunge.

Elihu Spencer is a local amateur economist with a long business history in global finance. His life work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable but the accuracy cannot be guaranteed.