Morgan Stanley
  • Wealth Management
  • Jul 14, 2021

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

While gold isn’t a strategic asset class, there are tactical reasons to consider adding it now. See three ways to go about it.

After years of trading in a narrow range around $1,200 an ounce, gold has been trading above $1,700 for the past year.  Given low correlations with other asset classes, gold may also have a role in a diversified portfolio as a hedge against potential downturns. It can also serve as a good allocation and hedge considering the continual risk of a potential rise in inflation from the record stimulus pumped into the economy.1 If rates fall, inflation returns, or if we see U.S. dollar weakness, gold could outperform.

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Historically, gold has exhibited low correlation to stocks and an inverse relationship to the dollar.

“The U.S. dollar may continue its recent slide,” says Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management. “When the dollar weakens, it may be a good time for certain investors to consider adding some gold to their portfolios.”

Nicholas Thompson, who manages Morgan Stanley’s physical precious metals offering for Wealth Management clients, says that there may be other reasons to consider investing in gold at this time. “Gold bars and coins often trade at a slight premium over the spot price (i.e., the gold price quoted on the exchange). That premium changes based on market conditions, and can increase when there are disruptions to the supply chain, refinery capacity or transportation availability. Increases in demand for physical bars and coins during times of increased uncertainty, combined with supply disruptions, can often push the cost to acquire these products higher, as seen during the COVID-19 crisis. 

Because there is so much government debt being issued by developed nations with negative yields2 and with the Federal Reserve potentially keeping a lid on interest rates through 2022, “The cost of owning gold has become less than owning high-quality sovereign debt in some cases,” Thompson points out. Those market conditions may be creating more global demand for gold.

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

  • 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 usually apply. Investors can also take delivery of physical gold if they want to store it themselves. In such cases, delivery fees would apply.

“Some high-net-worth clients may want something tangible, and to diversify away from book-entry securities, which typically dominate their investment portfolios,” says Thompson. “It’s one of the few investments that clients can physically hold and it can serve as a potential medium of exchange in certain scenarios.”

  • Gold funds that own the metal: Some mutual funds and exchange-traded funds also offer investors exposure to gold. For those that are pure-play, their value tracks the price of gold. 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.

  • 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, a Managing Director of Wealth Management’s fund due diligence group. 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 Financial Advisors to help clients choose among the gold and precious metals funds they cover.

Implementing a Hedge

“Some investors may feel they should reduce their allocation to equities if the odds of a U.S. recession rise, but buying some gold as a buffer is another approach to consider,” Shalett says. 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.

While gold isn’t typically viewed as a long-term strategic investment, 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.