{"id":2680,"date":"2021-04-02T01:39:49","date_gmt":"2021-04-02T01:39:49","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=2680"},"modified":"2021-04-02T21:27:36","modified_gmt":"2021-04-02T21:27:36","slug":"should-gold-have-a-roll-in-your-portfolio","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/should-gold-have-a-roll-in-your-portfolio\/","title":{"rendered":"Should Gold Have a Role in Your Portfolio?"},"content":{"rendered":"

By Herb Blank<\/p>\n

Our short answer is yes.\u00a0 Generally speaking, the amount should be between 5% and <\/span>10% for diversification purposes. Gold doesn\u2019t provide as much diversification as other assets in most time periods.\u00a0 But in the greatest equity market collapses in history 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.\u00a0 In other words, I don\u2019t advocate an allocation to gold because I think it\u2019s an above-average long-term investment.\u00a0 It is not.\u00a0 It\u2019s a defensive holding to mitigate huge and unexpected losses in the equity portfolio at a time you can least afford it.<\/span><\/p>\n

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So, given the perceived need for an allocation to gold, what is the best way of doing so? In retail brokerage accounts, it is easy to simply buy shares of Exchange-Traded Products (ETPs).\u00a0 These are essentially depository receipts on gold. There are four major gold ETPs: GLD – SPDR Gold Trusts, <\/span>IAU<\/span><\/a>\u00a0– iShares Gold Trust,\u00a0<\/span>BAR<\/span><\/a>\u00a0–\u00a0Granite Shares Gold Trust, and\u00a0<\/span>GLDM<\/span><\/a>\u00a0– SPDR Mini Gold Trust.\u00a0All four ETPs use a grantor trust structure which for IRS purposes is classified as pass-through security. In each case,\u00a0underlying gold bars are held in vaults around the world.\u00a0<\/span><\/p>\n

Here’s one important fact taxable investors need to know as a consequence for 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 higher tax rate.<\/span><\/p>\n

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:<\/span><\/p>\n\n\n\n\n\n\n
ETF<\/b><\/td>\n.Expense Ratio\u00a0<\/span><\/td>\n1-Year Ann. Tot. Return<\/span><\/td>\n3-Year Ann. Total Return<\/span><\/td>\n\u00a0<\/span><\/p>\n

5-Year Ann. Total\u00a0Return<\/span><\/p>\n

\u00a0<\/span><\/td>\n

10-Year Ann. Total Return.<\/span><\/td>\n<\/tr>\n
GLD<\/b><\/td>\n0.40%<\/span><\/td>\n16.56%<\/span><\/td>\n11.45%<\/span><\/td>\n8.58%<\/span><\/td>\n2.63%<\/span><\/td>\n<\/tr>\n
IAU<\/b><\/td>\n0.25%<\/span><\/td>\n16.90%<\/span><\/td>\n11.63%<\/span><\/td>\n8.77%<\/span><\/td>\n2.71%<\/span><\/td>\n<\/tr>\n
BAR<\/b><\/td>\n0.17%<\/span><\/td>\n16.97%<\/span><\/td>\n11..66%<\/span><\/td>\n\n\n\n\n\n
N\/A<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/td>\nN\/A<\/span><\/td>\n<\/tr>\n
GLDM\u00a0<\/b><\/td>\n0.18%<\/span><\/td>\n16.96%<\/span><\/td>\nN\/A<\/span><\/td>\nN\/A<\/span><\/td>\nN\/A<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

This table of annualized returns for 1- 3- 5- and 10-year periods ending 02\/12\/2021 based on NAVs according to ETF.com<\/span><\/p>\n

The differences in the returns mirrors the differentials in expense ratios. Launched in August 2017 by upstart GraniteShares to compete on the basis of fees, BAR is definitely the disruptor of the group and still the lowest cost provider at 17 basis points. Blackrock lowered its fee to 25 basis points in 2017 in response to the competitive threat. SPDR kept GLD at its fee of 40 basis points while launching a new fund, GLDM with M standing for “Mini shares”, at 18 basis points.\u00a0<\/span><\/p>\n

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Once again, if you already own GLD and have embedded capital gains, they would be taxed at the generally higher collectible rate so you may choose to hold those shares. Moreover, if you are a short-term trader, especially a long-short high-frequency trade, GLD with more than a billion dollars in average daily trading volume is probably your most comfortable choice.<\/span><\/p>\n

However, for any investors buying new shares and intending to hold them more than a few weeks, I recommend buying BAR, the gold ETP I hold in my personal accounts. For those who prefer brand names, especially those wishing to stick with the SPDR family, GLDM is a practically identical alternative with an expense ratio just 1 basis point higher. I find it hard to justify recommending to pay 8 basis points more to buy and hold IAU and impossible to recommend paying 23 basis points more to buy GLD. All four have more than $1 billion AUM and trade at an average spread of one penny according to ETF.com. Therefore, exit liquidity should not be an issue.<\/span>
\n<\/span><\/p>\n

The diversification benefits of gold GLD when the equity market goes into free fall through an ETP such as BAR, IAU or GLDM are tempered by two unfortunate realities.\u00a0 The first is the capital gains tax treatment mentioned above. The second shortcoming is that gold does not pay a dividend so there is no dividend income stream derived from the ETP that holds it.\u00a0 Another method to access a gold-like return stream that some investors use is to buy an ETF that holds a portfolio of the stocks of gold mining companies.\u00a0 iShares has the ETF with the highest AUM, with ticker symbol RING.\u00a0 RING does have a higher expense ratio, 0.39% rather than 0.25%.<\/span>
\n<\/span><\/p>\n

Has RING delivered gold-like returns the past five years and does it pay a dividend?\u00a0 The answer is that the returns of RING have been superior while following a remarkably similar pattern.\u00a0 Comparing RING with IAU for the period ending December 31, 2021, the one-year NAV return was 23.99% as compared with 16.90% for IAU.\u00a0 The analogous 5-year NAV returns were 23.58% and 8.77% respectively. \u00a0 Additionally, RING pays a yield that at year end was 0.75%.\u00a0 That is hardly a robust income stream but it is better than zero.\u00a0<\/span><\/p>\n

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Let\u2019s look at this other alternative, Newmont Corporation (NEM). The largest holding in RING (nearly 20%) is NEM.\u00a0 Indeed, from the time I started in the industry until the launch and subsequent acceptance of GLD and other ETPs to access gold bullion, NEM was the most frequent stock bought to access exposure to gold.\u00a0 During the same 5-year period NEM had a price appreciation of 25.3% accompanied by a 2.4% yield.\u00a0 As to tracking, the correlations between GLD, RING and NEM during this period ranged from 0.94 to 0.96.\u00a0 This is very close tracking for three different ETFs.\u00a0 This chart reflects the growth of $10,000 invested in all three between December 31, 2015 and December 31, 2020.\u00a0 It also reflects the fact that RING was more volatile during this period than IAU, and NEM was more volatile than RING.\u00a0 So during this period, an investor would have improved both capital appreciation and income considerably by simply buying Newmont in lieu of IAU.<\/span><\/p>\n

\"\"<\/p>\n

However, volatility cuts both ways.\u00a0 If it sometimes pays off to own a more volatile security when the precious metal is rising in price, it follows that it is probable that the fall of NEM may be greater if a subsequent downturn occurs.\u00a0 That\u2019s precisely what has happened in the first quarter for the stock.\u00a0 It has dropped nearly 10% since year end.\u00a0 Pulling its ValuEngine report, we can see that Newmont\u2019s annualized volatility is nearly 30%.\u00a0 It gets 3 Vs from ValuEngine, an average rating, for its current outlook even though its 3-year expected return is negative.\u00a0 It should also be noted that during gold\u2019s five-year bear market from 2011-2015, Newmont\u2019s price had fallen more than 20%.\u00a0\u00a0<\/span><\/p>\n

Once again, timing is everything in the market. NEM and RING tracked IAU closely for the past 5 years but that has not been true of all 5-year periods in the past.\u00a0 Still for those seeking income, NEM provides a tempting alternative to IAU and BAR.\u00a0 I will also note guardedly that another method of deriving income from IAU is to sell IAU call options known as a covered call strategy and considered more conservative than a traditional long holding.\u00a0 However, IAU options are thinly traded and the timing of the rolls can be tricky. If you or your financial advisor is expert at options strategies, this may be worth exploring.\u00a0 If not, then consider the above three options for diversifying your equity holdings.<\/span><\/p>\n

By Herb Blank<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By Herb Blank Our short answer is yes.\u00a0 Generally speaking, the amount should be between 5% and 10% for diversification purposes. Gold doesn\u2019t provide as much diversification as other assets in most time periods.\u00a0 But in the greatest equity market collapses in history when the endurance of the US market and dollar as the safe … Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[1775,1783,1782,1704,1773,1776,1777,1786,1774,1785,1779,1780,1781,1510,1778,1784,1787,28,1656],"_links":{"self":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2680"}],"collection":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/comments?post=2680"}],"version-history":[{"count":8,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2680\/revisions"}],"predecessor-version":[{"id":2689,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2680\/revisions\/2689"}],"wp:attachment":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/media?parent=2680"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/categories?post=2680"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/tags?post=2680"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}