Why now is the time to buy gold

I have written about the pros and cons of buying gold in past columns in 2011 and again in 2017. In those cases, gold was gaining attention because of rising prices or because investors were viewing the commodity as a safe alternative to traditional stocks and bonds. Despite a renewed interested in gold in those situations, I could not recommend buying the commodity.

Now, as we approach 2021, I have changed my mind. Owning some gold in your portfolio in the form of an exchange traded fund (ETF) may make more sense and here is why.

The reason I did not like gold as an investment previously was simply because investors didn’t receive any income from holding gold. They were better off in bonds, as interest rates on Treasury bonds were a lot higher at the time. Back then, bonds were not a bad investment. In fact, they turned out to be a very good investment, because interest rates kept falling and bond prices continued to rise.

Today interest rates on Treasury bonds are so incredibly low – less than 1 percent on a 10-year bond, that unless interest rates actually go negative, I do not see how an investor in Treasury bonds can make any money or gain much income in the next three to five years, let alone keep pace with inflation.

Therefore, the lack of income from gold is about the same as bonds now. Owning gold is also less corelated to the stock market than bonds when inflation is an issue.

Investors typically buy gold as a hedge to inflation, political unrest or market volatility. We certainly have election uncertainty and stock market turbulence in 2020 but the biggest factor influencing gold prices long term is inflation. We experienced this back in the 1970s when there was a lot of inflation and gold was a great asset to own.

Political unrest and market volatility have caused gold to rise 25 percent this year, but if the U.S ever gets any real inflation gold could double from $1,889 an ounce today.

All this new debt that the Federal Reserve and Congress is creating in the form of fiscal stimulus to combat the recessionary impact of the coronavirus has caused our national debt to explode by an additional $5 trillion dollars this year. Today, the national debt is $27 trillion and keeps growing daily.

Servicing the national debt has not been a problem thus far, but if interest rates ever rise in future years it could cause an inflationary spike. Moreover, if confidence in America’s currency or ability to repay its debt is called into question, rates will have to increase. If this happens, the price of gold will explode. An interest rate hike will not happen anytime soon, but a vaccine and improving economy in 2021 would really support the gold bulls.

If hedging your portfolio with gold appeals to you, the best way to buy gold is not in physical form since purchasing it that way usually involves handling and processing fees, storage costs and insurance. You can buy gold mining stocks, but then you are subject to specific company risk in terms of employee strikes and mismanagement.

The most liquid way to buy gold is through an exchange traded fund or ETF. There are several to options choose from, so be sure to buy one with significant assets and low fees since that will guarantee more liquidity. It’s also wise to select an ETF that owns physical gold as collateral, which will offer another layer of protection.

This article is for information and education purposes only. The author addresses concepts and theories that may not constitute a complete discussion of the issues. Individuals should consult with their own professional advisor for guidance specific to their circumstances. This material does not constitute legal, tax or investment advice. All investment and financial strategies involve risks, including but not limited to the risk of permanent loss or depletion of financial assets. Past performance is no guarantee of future returns.

Fred Taylor co-founded Northstar Investment Advisors, LLC in 1995. The firm specializes in managing personalized investment portfolios for individuals, families, and retirees with a focus on income generation. He is a member of the Colorado Forum and also served as an economic advisor to Colorado Governor Bill Ritter from 2008 to 2010.