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Answering Client Questions About Investing in Gold

Financial advisers can help their clients understand the pros and cons of investing in gold and how it can fit their overall portfolio strategy.

Gold and precious metals are often thought of as a store of value and a hedge against inflation. Especially in times of market volatility. financial advisers may have clients asking about investing in gold. Here are some thoughts to share with them.

How Gold Might Fit in a Portfolio

Gold can be a legitimate investment for some clients. Gold is an alternative asset and has a relatively low correlation to stocks. It can provide a good tool for portfolio diversification.

As long as a client is comfortable with gold’s role as a supporting player in their overall portfolio, an investment in gold can make sense. Gold is just one of many alternative assets that they can consider. If they have a particular interest in investing in gold, that’s fine. However, if as their financial adviser you feel that they could benefit from investing in alternatives but feel there are better options beyond gold, that should be part of the conversation.

How to Invest in Gold

There are several ways to invest in gold. The best method will depend upon a client’s situation.

Gold ETFs: Perhaps the easiest way is via one of several gold ETFs available. By far the largest in terms of assets is the SPDR Gold Trust ETF GLD. The underlying asset for the ETF is gold bullion stored in several secure vaults. As an ETF, it is traded daily, the price tends to move in line with the price of gold due to the underlying gold behind the ETF. Other gold ETFs may or may not have a similar structure in terms of being backed by physical gold.

An advantage of using a gold ETF is that they have daily liquidity, and there are no issues with selling the physical asset.

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Owning physical gold: If a client wants to buy physical gold, there are issues such as finding a reputable dealer and storing the gold. It’s generally not a good idea for a client to hold physical gold in their home for many reasons.

There are services that work with financial advisers to make this process easier for clients who are interested.

Gold can be purchased as bullion or as coins. Both require due diligence when purchasing, perhaps the coins more so than bullion in terms ensuring they are authentic.

One caution for clients is that gains on the sale of gold are taxed at a higher capital gains rate than similar gains on stocks. Most gold is held on a taxable basis, but it can be held in a self-directed retirement account as long as the gold meets certain specifications.

Futures: Another way for clients to invest in gold is by investing in gold futures. Investing in futures involves leverage. A small amount of money can control a relatively large amount of gold, which is great if the price rises but works the other way if the price of gold drops. It's important that clients understand these risks prior to going this route. In fact many brokers require that clients sign off on the fact that they do understand these risks before they are able to trade futures.

Stocks, ETFs or funds investing in miners: There are individual stocks of companies who mine or process gold and precious metals, as well as mutual funds which invest in companies in this segment. While these investments will tend to benefit when the price of gold is higher, these stocks and the funds that invest in them will also fluctuate based on the profitability of the underlying companies. The correlation to the performance of gold in this case is lower than buying the metal itself or an ETF backed by the physical commodity.

Investing in gold can be a good fit for some clients. If they express an interest their financial advisers should understand what’s behind this interest and help their clients know both the potential benefits and risks of investing in gold.