Bringing Home the Gold

For the past 5,000 years, gold has been synonymous with wealth, security, and power. Wars have been fought over it, civilizations conquered for it, and history shaped by it. William Shakespeare even commented on its influence in Richard III, writing that “gold were as good as twenty orators.” But for much of the past three decades, gold has been all but forgotten by most investors. Who can blame them? Gold had a spectacular run in the 1970s. Fueled by rising inflation, a falling U.S. dollar, and rampant speculation, gold prices soared from an average of roughly $58 per troy ounce in 1972 to $850 an ounce in January 1980. But until the last few years, except for a few brief spikes, gold has been mired in a 25-year bear market. Now, gold has recently regained much of its old luster, jumping from $278 an ounce in January 2002 to more than $900 per ounce today. While this increase does not quite match gold’s historic rise during the 1970s, it is nevertheless a welcome respite for gold investors battered by decades of declining prices.

The primary catalyst behind gold’s recent surge is the falling U.S. dollar. In fact, some experts estimate anywhere from 70% to 80% of the gains in gold prices since 2001 can be explained by the dollar’s decline. But other factors have also contributed to the surge in gold prices, including inflation fears, rising global instability, and increasing retail demand for gold jewelry in emerging market countries like China, India, and Brazil. Supply constraints are also adding fuel to the gold fire. While it used to take about 7 years to bring a new gold mine online, now it takes closer to 10 years, due to heightened environmental regulation. As a result, there is little excess supply in the market; this is likely to remain the case for several years. For centuries, the only way to invest in gold was to actually own the physical metal, either by purchasing gold coins or bullion bars. But buying physical gold has many drawbacks, including hefty storage, insurance, and shipping costs. All these costs eat into investment returns and make owning gold bullion or coins a complex and burdensome process.

Fortunately, investors who want to increase their gold exposure have other options. For example, they can purchase shares of individual gold mining companies like Newmont Mining (NEM), Barrick Gold (ABX), and Anglogold Ashanti (AU). There are also many mutual funds that invest in gold mining companies, or even in the metal itself. These can provide much-needed diversification in an area where extreme volatility is par for the course.

Finally, there are several exchange traded funds like the streetTRACKS Gold Trust (GLD) and Barclays Global Investors iShares Comex Gold Trust (IAU), which invest directly in gold bullion. Both ETFs trade on the New York Stock Exchange and give investors a way to own physical gold without all the accompanying problems and costs (both have expense ratios of only 40 basis points).

But there is a downside to gold ETFs. Because they invest in physical gold rather than gold mining stocks, long-term investment gains are treated like gains on collectables, and they are taxed at a maximum rate of 28%, significantly higher than the 15% rate applied to most other long-term capital gains.

David A. Twibell, J.D., is President of Wealth Management for Colorado Capital Bank, where he directs the bank’s portfolio management and wealth advisory practice. He can be reached at (303) 814-5545 or dtwibell@coloradocapitalbank.com.