With stocks near all-time highs and interest rates near all-time lows, many investors are taking a closer look at alternative investments. Such investments are loosely defined as any assets outside the conventional world of stocks, bonds and cash. The original example of such an investment is precious metals, particularly gold.
The appeal to precious metals is mostly centered on the potential benefit of diversification. The idea is that if stocks tank or interest rate soar, gold may increase in value and offset some potential losses. Beyond the potential benefit of diversification, however, history has shown that precious metals can also have extended periods of out-performance (see below).
In August of 1971, Richard Nixon made a surprise announcement to remove the convertibility of the US dollar into gold. In doing so, it broke the longstanding fixed price of gold, previously held at $35/oz since the 1950’s. From September, 1971, to January, 1980, gold increased from roughly $42/oz to over $650/oz. Gold experienced a similar run from mid-2001 to mid-2012, over which time gold increased from roughly $250/oz to nearly $1800/oz. Collectively, from September 1971 until today gold has produced an average compounded return per year of around 7.5%, a respectable return for any asset class.
When to Buy
Gold investors tend to do best in low-interest rate environments, especially when accompanied by a weak currency. While we believe interest rates may creep up, we anticipate a relatively low interest rate environment for quite some time. Although currencies are a wildcard, our new president has indicated that he feels the US dollar is too strong and would like for it to fall. The US dollar currently sits at a fourteen-year high, with gold prices roughly 30% below a peak in 2012. For investors considering alternative investments, gold may be worth a look.
How to Buy
There are various ways to get exposure to gold. While some investors may prefer to own physical gold coins, the hassle of purchasing, storing, and re-selling the coins is inconvenient and hinders liquidity. One preferred method of gold investing is the utilization of publicly traded funds designed to track the price of gold. These funds can also be held in an IRA, a useful feature for many investors.