By Elizabeth O'Brien
Gold has shined brightly this year, returning about 13% and outpacing the S&P 500 index. But does the precious metal deserve a place in your retirement portfolio?
While gold has pulled back a little lately, the case for owning it looks strong now. Inflation remains hotter than policymakers would like, and gold is viewed as an inflation hedge. Geopolitical tensions are running high, with wars in the Middle East and Ukraine. And gold's run-up to about $2,322 per ounce has defied its normal pattern of falling as interest rates rise.
Costco, for one, can't keep its gold bars in stock. But much of the recent demand driving gold's price to record highs comes from central banks, experts have noted. Some pros see the price moving even higher if everyday investors follow suit.
What's more, when the Federal Reserve eventually starts cutting rates, that may be an additional tailwind for the metal. Some of gold's strongest performances have come during Fed-cutting cycles, according to a recent commentary by the Wells Fargo Investment Institute.
Beyond the investment case, bullion is often pitched as the ultimate store of protection against calamity. Commercials for "gold IRAs" -- accounts that can accommodate physical gold -- tout them as a way for retirees to safeguard their life savings. Yet these accounts can be costly and illiquid and are an inappropriate receptacle for a 401(k) rollover.
Gold's role in a doomsday scenario is dubious. Proponents argue that physical gold would be valuable in a barter economy that could emerge following a social and economic catastrophe like a major war. Others say gold wouldn't be nearly as useful as goods that sustain life -- such as food and fuel.
Bottom line? Retirement savers shouldn't get carried away.
For starters, there's an opportunity cost. While gold has outperformed large-cap U.S. stocks this year, it has underperformed equities over every 10-year period for the past 100 years, counting both domestic and international stock markets, according to Morningstar. Unlike bonds and dividend stocks, moreover, gold doesn't throw off income. And it comes with carrying costs, such as the fees for exchange-traded funds like the SPDR Gold Shares, which charges 0.40% annually.
If you do want gold, keep it to no more than 5% of your portfolio, advisors say. It's easy to get exposure through the SPDR ETF. Just beware the tax implications, says Diane Pearson, a certified financial planner in Pittsburgh. The SPDR ETF, for instance, is structured as a trust; gains on a sale of shares held for more than a year are taxed at the "collectibles" rate of 28%, which is higher than long-term capital-gains rates.
That makes it best to hold the Gold ETF in a tax-advantaged account such as an individual retirement account, which is also a good place for other commodity ETFs that can cause income-tax headaches.
While the investing case for owning gold is shaky, there may be psychological benefits. The yellow metal worked well as portfolio ballast during the financial crisis of 2008-09, outperforming when stocks tanked. Holding some gold during that stretch may have helped investors sleep at night.
If a small gold allocation helps investors stay the course rather than bail out of turbulent markets, then it's worth its weight in the portfolio. Those who see a small part of their portfolio rising as everything else is falling might be less tempted to do something rash, like pulling all their money from stocks. That might feel good when stocks are tanking, but most investors who leave won't return until stocks feel comfortable again -- and at that point, they will have missed most of the recovery.
Setting aside the psychological benefits, gold probably won't add much to your returns. "If you want to diversify your portfolio with some gold ETFs because you have a thesis or have some fear, OK," says Kevin Dunleavy, an advisor at Freedom Financial Management in Orlando, Fla. "Just don't let fear or FOMO [fear of missing out] drive your investment decisions."
Write to Elizabeth O'Brien at elizabeth.obrien@barrons.com
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(END) Dow Jones Newswires
April 26, 2024 21:30 ET (01:30 GMT)
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