Does Gold Belong in Your Retirement Plan?

Gold bars in rows. — (Image credit: Getty Images)

Gold has been in the headlines lately. Maybe you’ve noticed. I’m specifically talking about the shiny metal being sold by warehouse giant Costco. The bars are selling out within hours, if you can get them at all.

With so much enthusiasm around gold, it begs the question: Should gold be a part of your retirement plan?

Gold prices over the decades

It’s important to recognize how gold behaves. If you pull up a price chart that spans several decades, you’ll notice something. Gold has relatively short periods where it rockets up and then longer periods where it does nothing (or worse).

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If you’re an expert market timer, then you can obviously profit from buying during the uptrends and avoiding those long periods of underperformance. Unfortunately, during my time in this business, I’ve noticed something. There are very few investors who have even a remote shot at successfully timing the market. For most of us then, it’s the long term that we should concern ourselves with.

So how does gold do over the long term?

Here is one way to think about gold prices. Two hundred years ago, an ounce of gold could have afforded you one quality men’s suit. Today, that same ounce of gold will also buy you a high-quality men’s suit. In other words, it does a fantastic job of preserving purchasing power over the long term.

Physical gold has its plusses and minuses. There’s nothing quite like holding a bar of gold in your hand. And if we’re ever in some sort of doomsday scenario — the grid has collapsed, paper currency is worthless and so on, you’ll likely want your gold close at hand. Of course, hoarding coins and bars can make you a target for thieves. And since the IRS classifies physical gold as a collectible, you may be taxed at a steeper tax rate (currently as high as 28% on long-term gains) if you ever need to sell your gold.

Investing in gold without buying bars

Fortunately, there is more than one way to invest in gold. At SAM, we take a four-pronged approach. Part of that is owning physical gold, but there are three other categories that can benefit when the price of gold appreciates:

Major miners. Stocks of the largest companies that explore and produce gold, like Newmont Corp. (NEM) and Barrick Gold Corp. (GOLD), can be attractive at the right prices. They have operational leverage, meaning that while the price of gold rises, their costs stay the same, which can result in windfall profits when gold is a hot investment.

Emerging producers. This is the high-risk, high-reward part of the gold universe. Some of these companies don’t even produce gold. Rather, they are valued on their “pounds in the ground.” The lack of an operating history means these stocks carry greater uncertainty, but they can trade at a fraction of the value of their proven gold reserves.

Royalty companies. These are like banks for the mining industry. They provide capital to miners in exchange for a percentage of their production. Royalty companies have few employees and low overhead costs. When they’re not hunting for deals, they pretty much sit back and collect money. This superior business model has resulted in high profit margins and outstanding returns over time.

Is gold for you?

Whether you should own gold, how you should own it, and how much you should own ultimately depends on you and your financial goals. If capital preservation over the long term is a top priority for you, that argues for a larger allocation. But if you are growth- or income-driven, perhaps a small bit of exposure makes more sense for you. This sort of planning can be done on your own or with the assistance of a financial adviser.

Just know that if Costco is yet again out of stock or limits how many gold bars you can buy, you have many other options.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Michael is a Portfolio Manager and Deputy Chief Investment Officer at SAM, a Registered Investment Advisor with the United States Securities and Exchange Commission. File number: 801-107061. He sources investment opportunities and conducts ongoing due diligence across SAM’s portfolios. Michael co-manages SAM’s Income and Tactical Select strategies. Prior to joining SAM, Michael worked with high-net-worth private clients for the largest independent wealth management firm in the United States. He was also a senior analyst for one of the largest investment-grade bond managers in America. Michael joined SAM in 2017.