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Wealth Management

Could Investing in Gold Add a New Dimension to Your Portfolio?

Consider gold as a long-term diversifying asset. There are good reasons to believe it could be more valuable in a tactical context. Here are three ways to go about it.

Key Takeaways

  • Gold can play an important role as a diversifier in many portfolios.
  • You can take several approaches to get exposure to gold in your portfolio, including buying the physical metal, owning gold mutual and exchange-traded funds (ETFs), and investing in gold mining companies and funds.
  • Choosing the most appropriate gold fund for your portfolio requires consideration of your risk tolerance and asset allocation plan. 

Given its low correlation with other asset classes, such as stocks and bonds, gold can provide an important role in portfolios: diversification. Gold’s ability to act as a “store of value” can help mitigate risk during times of market volatility, geopolitical instability and economic uncertainty and may be a reason behind its surge at the start of this year. In addition, gold may be able to serve as a hedge against inflation. Historically, gold has exhibited an inverse relationship to the U.S. dollar, meaning as the dollar weakens, gold prices tend to rise.

 

So, how can investors add gold as a practical matter to their portfolios? Below are three main ways to get exposure:

  1. 1
    Physical gold

    Investors can buy gold bars and coins as part of their Morgan Stanley brokerage account and can also own gold-minted American Eagle coins as part of their retirement account. Investors may pay a premium over the spot price of gold. The gold is physically held by a third party, not Morgan Stanley. Storage fees apply. Investors can also take delivery of physical gold if they want to store it themselves. In such cases, delivery fees would apply.
  2. 2
    Gold funds that own the metal

    Some mutual funds and exchange-traded funds also offer investors exposure to gold. For example, funds that offer the most direct exposure track the price of gold. In this case, the fund shoulders the cost of holding physical supply and passes it along to the investors in the expense ratio.

    There are some drawbacks: Some gold funds are taxed as collectibles, so they don’t benefit from the lower long-term capital-gains rates for which stocks may qualify. Plus, they don’t produce any income, so the expense ratio can eat into principal every year.
  3. 3
    Mining companies

    Investors can get exposure through equity in companies that mine for gold, including the purchase of individual stocks or as part of a fund. 
 

“The mining companies tend to be more volatile than physical gold,” says Michael Jabara, co-head of Global Investment Manager Analysis at Morgan Stanley Wealth Management. Typically, the mining sector correlates with the price of gold, but individual stocks may face company-specific risks, Jabara says

 

Even within this small sector, choosing a fund can be complex. Some funds own companies that mine different types of precious metals; some funds are global, and others own only small- and mid-capitalization mining companies. Investors may not know which is appropriate for their risk tolerance and asset allocation plan. Jabara’s team of analysts often works with Morgan Stanley Financial Advisors to help clients choose among the gold and precious metals funds they cover.

 

Implementing a Hedge

Some investors who feel they should reduce their allocation to equities if the odds of a U.S. recession rise see gold as an opportunity in such times. Historically, gold prices tend to rise when bond yields, adjusted for inflation, fall. Conversely, a stronger dollar and rising yields, driven by improved global growth, would likely limit gold’s upside.

 

For some investors, an allocation to gold as a component of a diversified portfolio may be worth considering.

 

Whether it be gold coins, bars or ETFs, contact your Morgan Stanley Financial Advisor to find out which vehicles could be best for your portfolio.

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Diversification does not guarantee a profit or protect against loss in a declining financial market.

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the research departments of Morgan Stanley & Co. LLC or Morgan Stanley Smith Barney LLC (“Morgan Stanley Wealth Management”). It was prepared by Morgan Stanley Wealth Management sales, trading or other non-research personnel. Morgan Stanley Wealth Management is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the U.S. Securities Exchange Act of 1934, as amended.  Past performance is not a guide to future performance. Please see additional important information and qualifications at the end of this material.

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Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

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