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Retail investors are gaining exposure to gold through ETFs and other investment vehicles in order to hedge their investment portfolio during market turmoil. And while gold is often seen as a “safe haven” asset used to diversify portfolios, it isn’t a “magic shield,” against market risks and volatility, said Peter Cunningham, financial advisor and senior vice president at Siebert Financial.
“Gold protects your purchasing power, not your income. It can be very volatile in the short term. When it shines, it’s in a long term wealth preservation plan,” serving as a hedge “during periods of geopolitical stress, currency weakness, and stubborn inflation,” Cunningham explained.
“You don’t just buy gold because you’re scared. You buy it because of its broader purpose in your portfolio. When investors chase it after a run up, they usually regret that timing,” Cunningham said of gold prices, which soared to a record high of $4,381.58 per ounce in October.
The Role of Gold in Portfolios
State Street Investment Management published an online post in late October, noting that many investors “classify gold as a traditional commodity or currency,” but its team views gold as an “independent alternative asset class that warrants a distinct allocation in investment portfolios,” co-authors Aakash Doshi, head of gold strategy, and Diego Andrade, senior gold strategist, wrote.
“Unlike other commodities, liquid alternatives, and currencies, gold’s demand is relatively price inelastic and spans four distinct sectors: jewelry, industrial use, investments, and central bank reserves,” the post said.
“Since 2008, gold’s correlation to the global 60/40 portfolio has trended lower, while other alternative asset classes have experienced an increase in their correlation to global 60/40 portfolios, potentially reducing the diversification benefits they provide to investors’ portfolios,” the State Street strategists wrote.
Cunningham at Siebert Financial said that some of his clients gain exposure to gold through ETFs.
“It gives them liquidity and it gives them transparency,” Cunningham said. “It also gives them clean pricing without the storage and insurance issues you would have if you own the physical metal. It allows advisors like me to size the allocation appropriately,” Cunningham said, noting that he usually targets a 3% to 10% allocation to gold, depending on the client’s risk portfolio or what role they want the asset to play in their investment strategy.
Allocations to gold — and other precious metals — can also be accessed via unit investment trusts (UITs), which may be of interest for those seeking more transparency into holdings and fees, he said. UITs typically have a longer investment horizon as well.
“UITs are a static portfolio where it would hold those positions. For someone who wants a little more transparency, the UITs are great,” Cunningham said.
