The following is the sixth of a series of weekly articles in which Sheryl will provide overviews of investment options that offer alternatives to bank accounts. Last week's article covered annuities. As with any investment that's not an insured deposit account, there are risks. Some may feel that these risks are worth it for the chance of higher yields. The focus of these articles will be on conservative investments that may appeal to some savers who want a chance of higher yields and minimal risk.
Equities are far from the only investing game in town. Gold and other commodities, like corn, beef, oil and natural gas can have much appeal for not only the sophisticated investor, but the average Jane and Joe.
"Anyone can invest in gold and silver, regardless of income. We have clients who have begun accumulating precious metals through payroll deductions as little as $10 per pay period, alongside people who have invested over $1 million in gold and silver," says Josh McCleary, chief operating officer of Mass Metal, which has a service, SilverSaver.com, that connects individuals with direct ownership of physical silver and gold.
"Investing in commodities is much easier than it has been prior to the last decade. Prior to that period, you would need to invest in futures contracts in order to get exposure to commodity prices. While you could invest in companies that produced those commodities, direct exposure was only available via the futures market," says Kirk Chisholm, wealth manager and principal with Innovative Advisory Group.
These days though, in addition to the futures market, you can get access to commodities via Exchange-traded funds, Closed-end funds and Exchange-Traded Notes. Alternatively, there is the opportunity to invest in silver and gold coins or bullion.
So if you’re thinking of expanding your investing horizon to include commodities, here are some key considerations.
What You Need to Know
Investing in gold and commodities should be viewed as part of a balanced personal finance strategy, says Terry Hanlon, president of Dillon Gage Metals, a precious metals wholesale trading firm. "Gold and other precious metals for the most part, act as a ‘hedge’ against inflation and the stock market in general," he says.
Commodities offer diversity and is a hedge against dollar devaluation, says Donny Gamble, Jr., founder of Personalincome.org. One advantage too, he says, "Gold is a recognized world currency that can be exchanged all over the world.
Andrew Carrillo, president and founder of Barnett Capital Advisors, says that if you’re buying gold as "insurance" to not worry about day to day volatility. "If gold is lower than it is today in 3-5 years, the retiree purchasing gold for insurance should be happy because what that tells them is that their pension payments are strong and they still have purchasing power. The largest risk for retirees is inflation, and gold can help hedge that risk. I expect gold’s outperformance of stocks over the last decade to continue the next few years as well."
However, be mindful that each commodity is its own creature. For example, "when the market is up, gold and silver tend to decline and vice-versa. But platinum and palladium, leveraged heavily in industrial usage, tends to mirror the fluctuations of the market," says Hanlon.
It’s essential to have proper knowledge about each commodity, along with historical trends and data. "Global economic development, technological advances and market demands for commodities can all have an influence on prices of staples such as oil, aluminum, copper, sugar and corn," says Gamble.
Hedge fund guru Damon Verial cautions against equating gold to silver. "Historically, they have shared a similar role, and their exchange rate has been pretty constant as far as commodities go. But gold and silver are different commodities."
While Hanlon and others may tout commodities as an "insurance policy" of sorts, don’t get it in your head that commodities are trouble-free. That’s hardly the case.
Keep in mind the facts.
"Commodities do not grow, multiply, pay interest or dividends. You can only profit from a favorable price change," says Jeff Born, professor of finance and executive director of the MBA program at D’Amore-McKim School of Business at Northeastern University.
Look at gold. The price of gold tends to move based on a few factors. One of the biggest is if the market senses an increase or decrease in credit risk in the financial system. "Traditionally, gold prices outperformed when real interest rates were negative (that is when price inflation is higher than base interest rates)," says Anthem Blanchard, founder and CEO of Anthem Vault. Other factors that move the price of gold include if the market anticipates a large increase in base money supply, price increases and decreases in core goods and services, and dollar strength and weakness.
Since there are many ways to invest in gold and silver, it’s important to research what’s the best way to own precious metals. "There is a difference between investing in commodities on the stock market – a "paper" ownership, which mimics the price of gold, versus direct ownership. Owning the hard assets give you the benefit of investing in gold, without taking on the risk of ‘owning’ digital assets that could ultimately disappear if there was a major issue in the market or the provider of a paper security," points out McCleary.
Direct ownership of gold and silver is a smart investment move if people know how to do it right, says McCleary. "You need to be cautious where you buy from, because historically, investors unknowingly pay high premiums on small quantities of hard assets."
If you decide to go for the gold, the experts share their wisdom. "Don’t invest in gold because you’re convinced that things are going downhill; invest in gold because it makes sense at the time (based on market sentiment and analysis)," says Verial.
Consider the tax implications. Gold is taxed at the collectible tax rate, rather than the long term capital gain rate.
If you buy physical gold in any large quantity, store it in a licensed depository, rather than in a bank or your home, says Hanlon.
Understand the liquidity options and associated costs of your gold investment vehicle of choice.
Finally, says Born, "Investments in precious metals and commodities are very high-risk. Limit your exposure to a small proportion of your total invested portfolio, 2-5% maximum. When I say very high-risk, be prepared to lose 100% of your investment – not quite as bad as going to a casino and parking a big bet on ‘red’ or ‘black’ at the roulette wheel, but close enough."
Editor's Note: For more viewpoints on gold investing, please refer to the CBS MoneyWatch article by Allan Roth, "Gold - My Best Investment Ever" and Clark Howard's article "Buying gold the Clark Smart way".