Why Now's the Time to Invest in Gold

Editors' pick: Originally published Dec. 29.

While generally speculative, an investment in gold has rarely appeared so reasonable and has become increasingly so recently. Several factors are behind a brighter sheen on the precious metal, including the stock market rally, the threat of trade wars, the hike in interest rates and gold's own depressed price.

While not without risks, the rally in the stock market could give investors good reason to look to gold for alternatives to stocks. Already at or near its high when Donald Trump triumphed last month, the stock market went on another 6% romp on the sheer hope of deficit spending.

Stocks, already expensive, with price-to-earnings multiples at among the highest levels ever may give investors good reason to direct fresh funds to gold or to diversify out of at least some of their stock holdings.

Any hopes of future stock gains could be highly vulnerable given the very real threat of trade wars, principally with China. If the two nations do come to trading blows it's widely thought the U.S. will suffer more. With its proxy being the stock market, investors have another reason to seek alternatives to a market facing a correction or worse.

Traditionally, bonds provide a sturdy flight to safety -- but not in this financial and economic climate. They have been badly beaten down and with the long-threatened interest rate hikes finally coming to pass any future capital gains don't hold much promise with yields bounding upwards.

Gold, however, does its best in uncertain times. Investors like hard assets then and gold's price has not been as attractive in years. In fact, it has been in a long decent during the current bull market and, indeed, is nearly 40 percent below its 2011 high.

The risks, though, are very real. Gold is a highly volatile investment and the next four years promise to be anything except predictable. For example, Donald Trump may go back on his promise to slap huge tariffs on imports once in office. If he failed to put them in place and global trade prospered, that could seriously hurt any rebound in gold prices.

Still, for investors who think that gold may be at bargain basement levels and primed to rise, there are several places to look to invest. They could buy gold coins, gold futures or mining stocks. However, one of the most direct, most liquid, simplest, safest, easy to understand and least expensive routes is to buy gold exchange-traded funds or, possibly, mutual funds.

Among ETFs, the iShares Gold Trust  (IAU) stands out. It is one of the older gold ETFs and has weathered gold's fall better than many of the other precious metal's funds. It is also easily among the cheapest with an expense ratio of a mere .25 percent.

Gold mutual funds tend to be more expensive than gold ETFs, with expense ratios frequently over 1 percent. However, at least one stands out for being cheaper than almost any gold fund and doing better than IAU over the short run. It is the Vanguard Precious Metals and Mining (VGPMX) fund and has an expense ratio of just .35 percent.

Whatever the performance of these and other gold funds, the chance a first-time investment in one of them adds diversity to a portfolio is high.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the funds mentioned.

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