U.S. mints pure gold–but is it a good investment?
Starting today, Uncle Sam becomes a bigger player in the global gold market.
For the first time ever, the United States Mint has begun producing a 24-karat-gold coin that will be made available to investors and collectors alike. The new coin, which goes on sale this afternoon, bears the image of an American buffalo on one side.
While Uncle Sam has for years minted another gold coin, the so-called American Eagle, it consists of 91.67 percent gold. The new American Buffalo coin is a much purer product consisting of 99.99 percent gold. To learn more about the new coin, consumers can visit www.usmint.gov.
Of course, the United States is not the only country that produces pure gold coins for the investing public. In fact, the American Buffalo coin will have to compete with other, more established competitors in the world market, such as the Canadian Maple Leaf and the Chinese Panda.
The U.S. Mint will be offering a limited "proof" version of the coin to collectors directly through its website starting at noon eastern time on June 22. A 1-ounce bullion version of the coin will also be hitting the gold market (to find an authorized dealer, you can visit here www.usmint.gov/bullionretailer).
The timing of the government's introduction of the American Buffalo coin raises some interesting questions. Investors' appetite for gold has certainly soared since the start of this decade, as prices on most commodities have skyrocketed. In fact, gold recently hit a new quarter-century high of more than $700 an ounce.
But since mid-May, gold has lost some of its luster. Recently, gold prices fell below $560 an ounce, though they have since recovered slightly to around $590 an ounce.
The U.S. Mint isn't the only player that seems a bit late to the gold party. Last month, Van Eck Global launched the first U.S. exchange-traded fund composed entirely of gold-mining stocks.
The sell-off in gold coincides with a correction in other commodities and speculative assets that began in May as central banks throughout the world began raising interest rates, diminishing investor appetite for taking risk.
To be sure, many gold investors believe that the recent drop in prices is simply a short-term correction that may provide investors with a buying opportunity.
"The environment is still very favorable for gold," says Michael Cuggino, fund manager for the Permanent Portfolio, a mutual fund that invests in a variety of assets including stocks, bonds, and gold.
Gold tends to do well in periods of growing economic and geopolitical uncertainty, rising inflation, and a falling U.S. dollar, Cuggino said. And those trends certainly exist today.
But financial planners warn investors not to try chasing the recent past returns of gold. "People are trying to chase a hot asset class when they've already exhibited a lack of tolerance for volatility in stocks," said Jim Shambo, a financial planner in Colorado Springs, Colo.
Shambo noted that between the mid-1980s and the start of this decade, gold prices pretty much went nowhere. Investors who purchase gold today should recognize that they "could be sitting there for a good decade before anything happens to the price," he says.
And unlike stocks and bonds, you don't get paid to wait for gold prices to rise through dividends or interest income.
"It doesn't provide any cash flow," Shambo says. As a result, gold probably does not belong in a retiree's portfolio, he says.
If you do own gold, it probably should not exceed 5 to 10 percent of your total portfolio, financial planners say. Remember that no matter how much gold you own, it is a single asset.
Also keep in mind that there are ways to hedge against inflation without owning gold. John Markese, president of the American Association of Individual Investors, notes that investments in real estate, stocks, inflation-protected bonds, and natural-resources funds all provide investors with an inflation hedge.
Moreover, even if you want exposure to gold, there are other, more efficient ways for small investors to gain exposure to the precious metal than buying physical coins.
Investors who purchase physical gold will have to store and insure their inventory – possibly for years or decades. This means you will most likely incur annual storage costs. That's something you don't have to worry about with paper assets like stocks and bonds.
What's more, small investors might not be able to get the best pricing when they trade a handful of coins at a time.
"Buying or selling in small quantities – one gold coin here and there to rebalance your portfolio – can be quite inefficient," said Cuggino.
An alternative for small investors is to invest in a gold mutual fund, which invests in shares of gold-mining companies and sometimes physical gold. Or, you can invest in a regular mutual fund that treats gold as a core holding, like the Permanent Portfolio, which buys and holds physical gold.
Of course, some experts like Markese think that investors don't need to own gold at all. "Whenever gold runs up, people get interested in owning it," he said. "But it's proven to be a high-risk, highly volatile asset that's performed poorly over long periods of time."