Should Gold Have A Role In Your Overall Portfolio?

My short answer is yes. Generally speaking, the amount should be between 5% and 10% for diversification purposes.

Gold doesn’t provide as much diversification as some other assets in ordinary time periods. Event studies show that in the greatest equity market collapses in the history of 6months or more and when the endurance of the US market and dollar as the safe dollar haven of the future has fallen into question, the price of gold has always risen.  In other words, I don’t advocate an allocation to gold because I think it’s an above-average long-term investment. It has a long-term expected return near zero. It’s a defensive holding to mitigate huge and unexpected losses in the equity portfolio at a time you can least afford it.

So, given the need for an allocation to gold, what is the best way of doing so? In retail brokerage accounts?  

SInce 2003, it has become easy to buy shares of Exchange-Traded Products (ETPs) that are essentially depository receipts on gold. There are four major gold ETPs: GLD - SPDR Gold Trusts, IAU - iShares Gold Trust, BAR - Granite Shares Gold Trust, and GLDM - SPDR Mini Gold Trust. All four ETPs use a grantor trust structure which for IRS purposes is classified as pass-through security. In each case, underlying gold bars are held in vaults around the world. 

Here's one important fact taxable investors need to know as a consequence of the classification of pass-through securities. The capital gains tax rate may be considerably higher than for normal funds. Gold and hence shares of each of these funds is considered a collectible with a distinct and usually is taxed at a higher rate.

Since all four funds are based on the value of the gold they hold, any differences in investor returns is generally a function of the expense ratio as shown in the chart below:

This table of annualized returns for 1- 3- 5- and 10-year periods ending 02/12/2021 based on NAVs according to

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Disclaimer:Options strategies are not appropriate for all investors.  If you are inexperienced at using options, do not attempt to implement the covered call strategy described in the study ...

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