Could Investing in Gold Add a New Dimension to Your Portfolio?
After five years of trading in a narrow range around $1,200 an ounce, gold has been trading above $1,700 in recent months. Investors often buy gold as a hedge against perceived slowing global growth and potential stock market declines.
Historically, gold has exhibited low correlation to stocks and an inverse relationship to the dollar.
“The dollar may be near a peak,” says Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management. “If the dollar weakens, this 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 yields1 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 suitable 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.
 CNBC “Amount of Global Debt with Negative Yields Balloons to $15 Trillion,” CNBC.com, Aug. 7, 2019.
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.
This material was prepared by sales, trading or other non-research personnel of Morgan Stanley Smith Barney or its affiliates collectively hereinafter, (“Morgan Stanley Wealth Management,” or “the firm”). This material was not produced by a research analyst of Morgan Stanley & Co. LLC or Morgan Stanley Wealth Management, although it may refer to a Morgan Stanley & Co. LLC or Morgan Stanley Wealth Management research analyst or report. Unless otherwise indicated, these views (if any) are the author’s and may differ from those of the aforementioned research departments or others in the firms.
The securities/instruments discussed in this material may not be suitable or appropriate for you. The appropriateness of a particular investment or strategy will depend on your individual circumstances and objectives. This material does not provide individually tailored investment advice or offer legal, tax, regulatory or accounting advice. By providing this material to you, Morgan Stanley Wealth Management is not advising you to take any particular action based on the information or opinions or views (if any) contained in this material. Prior to entering into any proposed transaction, you should determine, in consultation with your own advisors, the potential economic, legal, tax, regulatory and accounting risks, merits, characteristics and consequences of the transaction. The information contained in this material is not intended to, and should not, form a primary basis for any investment decision. You should consider this material among other factors in making an investment decision. Unless stated otherwise, this material has not been based on a consideration of any individual client circumstances and as such should not be considered to be a tailored investment recommendation.
Physical precious metals are non-regulated products. Precious metals are speculative investments, which may experience short-term and long-term price volatility. The value of precious metals investments may fluctuate and may appreciate or decline, depending on market conditions. If sold in a declining market, the price you receive may be less than your original investment. Unlike bonds and stocks, precious metals do not make interest or dividend payments. Therefore, precious metals may not be suitable for investors who require current income. Precious metals are commodities that should be safely stored, which may impose additional costs on the investor. The Securities Investor Protection Corporation (“SIPC”) provides certain protection for customers’ cash and securities in the event of a brokerage firm’s bankruptcy, other financial difficulties, or if customers’ assets are missing. SIPC protection does not apply to precious metals or other commodities.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.
Stocks of medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.
Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio.
Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.
Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
This material may contain forward-looking statements based on assumptions as of the date noted and there can be no guarantee that they will come to pass.
You should seek tax advice based on your particular circumstances from an independent tax advisor. The firm is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or under section 4975 of the Internal Revenue Code of 1986, as amended (“Code”), in providing this material. 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 (the “Municipal Advisor Rule”) and the opinions or views (if any) contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule.
This material was prepared by or in conjunction with Morgan Stanley Wealth Management trading desks that may deal as principal in or own or act as market maker or liquidity provider for the securities/instruments (or related derivatives) mentioned herein and may trade them in ways different from those discussed in this material. Morgan Stanley Wealth Management and its affiliates may act in a principal or agency capacity and will charge a markup or commission for most transactions in the securities/instruments mentioned herein. The applicable trading desk may have accumulated a position in the subject securities/instruments based on the information contained herein. Trading desk materials are not independent of the proprietary interests of the firm, which may conflict with your interests. We may also perform or seek to perform investment banking services for the issuers of the securities/instruments mentioned herein.
The author(s) principally responsible for the preparation of this material receive compensation based upon various factors, including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors. Morgan Stanley Wealth Management is involved in many businesses that may relate to companies, securities or instruments mentioned in this material. These businesses include market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking.
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. Any such offer would be made only after you had completed an independent investigation of the securities, instruments or transactions, and received all information required to make your own investment decision, including, where applicable, a review of any prospectus, prospectus supplement, offering circular or memorandum describing such security or instrument. That information would supersede this material and contain material information not contained herein and to which prospective investors are referred. This material is based on public information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein is stale or may change. We make no express or implied representation or warranty with respect to the accuracy or completeness of this material, nor are we obligated to provide updated information on the securities/instruments mentioned herein.
The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, prices of securities/instruments, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. We have no obligation to tell you when such assumptions may change. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Morgan Stanley Wealth Management does not represent that any such assumptions will reflect actual future events or that all assumptions have been considered or stated. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein.
The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warranties or representations, express or implied, relating to the accuracy, completeness or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. Unless otherwise specifically indicated, all information in these materials with respect to any third party not affiliated with Morgan Stanley Wealth Management has been provided by, and is the sole responsibility of, such third party and has not been independently verified by Morgan Stanley Wealth Management, its affiliates or any other independent third party.
This material may not be sold or redistributed without the prior written consent of Morgan Stanley Wealth Management. This material is not for distribution outside the United States of America.
© 2020 Morgan Stanley Smith Barney LLC. Member SIPC.