Gold has experienced a roller coaster ride in recent years, and while advocates promote the commodity’s prospects moving forward, many advisors aren’t convinced the precious metal will help their clients’ portfolios.

Gold proponents, however, aren’t ceasing to make their case to advisors. A report recently released by the World Gold Council emphasizes how gold can be a key element of an alternative asset strategy and a hedge against losses elsewhere during periods of risk. In light of unrest in Ukraine and the Mideast, investors may increasingly be interested in gold.

Data providers like Morningstar have traditionally found that in down markets, the precious metal gains value. The World Gold Council claims its research demonstrates that gold outperformed stocks and other alternative investments at the end of global risk events.

Based on data provided by Morningstar, the S&P GSCI Gold Index significantly outperformed the S&P 500 and the Wilshire 5000 Total Market indexes in the three years of the financial crash and for two years after the Sept. 11 terrorist attacks.

Gold peaked in September 2011 with an all-time high price above $1,900 an ounce. Last year, however, was a grim struggle.

This year has been somewhat better. The World Gold Council’s SPDR Gold Trust (GLD), which is the largest gold-backed ETF globally, was up more than 6.25% toward the end of summer, after a 28% loss in 2013. At that point, 2014’s top 100 performing funds included 25 gold-related funds, according to Lipper data.

“The sector is still mixed on gold, but advisors are clearly looking at it again after what happened last year,” says Marcus Grubb, managing director for investment strategy at the World Gold Council. “Gold and gold mining have indeed done better than much of the market expected this year, and are one of the top performers.”

The World Gold Council concluded in a white paper this past spring that gold allocation should measure between 2% and 10% for a wide range of investor portfolios. The London-based organization  has added five staff members in New York to produce research for advisors and investors.


However, many advisors aren’t biting — at least for the short term. UBS financial advisor Jonathan Murray says that despite a strong first half, UBS is bearish on gold. He attributes much of the 2014 rebound to speculative accounts vacating short-term positions.

“We are seeing an unwinding of positions on gold fortunes,” Murray says. “Once the positions are wound down, it can lead to a decline in gold prices.”

Murray says UBS is forecasting that gold prices will go no higher than $1,350 an ounce this year and may go as low as $1,200, almost exactly where it began 2014.

One major factor that Murray expects to keep gold prices down is poor financial conditions in India, where gold is widely used as dowry at weddings, which are often held during the third quarter. Demand for physical gold will not be as high as previous years in the Asian country during the second half of 2014, he says.

Grubb disputes the idea that demand for gold is relatively weak. He estimates that gold demand in India will be around 28.9 million to 32 million troy ounces, compared with last year’s 31.3 million troy ounces.

“Demand is holding up well from jewelry buyers and also from technology and central banks, so although the investment demand is not there… consumer(s) all over the world are taking up the slack,” Grubb says. “Longer-term projections of gold demand suggest it will definitely exceed supply.”

Mark Luschini, chief investment strategist at regional broker-dealer Janney Montgomery Scott, became bearish on gold from a tactical standpoint last summer once the price dropped past $1,600 an ounce. Price increases in 2014 have not changed his view.

“We looked at the rally that has occurred this year as a countertrend rally,” says Luschini, who establishes Janney’s asset allocation models used for portfolio construction and financial planning. “You had some weak holds left in gold in the last part of 2013 that hadn’t been fully purged. That probably led to an exaggeration and sell-off of gold.”

The issue of how to address gold in clients’ portfolios has been a hot topic at Wells Fargo Advisors. The firm’s chief international strategist, Paul Christopher, says he has received 

numerous inquiries from advisors asking about gold  strategies. “For a long-term investor, which most at Wells Fargo are, gold does not offer much,” Christopher says.


Some research suggests that gold can play a positive role in client portfolios. A white paper issued by Flexible Plan Investments last November, The Role of Gold in Investment Portfolios, concluded that over a 40-year period from 1973 to 2013, the optimal portfolio would have been one with a 20% allocation in gold and roughly 50% in stocks and 30% in bonds.

The report noted that the results were “contrary to conventional wisdom.” It also noted gold was the second highest performing asset class over the last four decades at 7.6%, behind only equities. In bear market conditions, however,  gold outperformed all other asset classes since it offers inflationary and crisis protection, according to the study.

“We feel gold is an underutilized asset in the asset allocation decisions of advisors,” says Flexible Plan Investments  President Jerry Wagner, a co-author of the white paper along with David Varadi and David Wismer. “Gold can be a true diversifier for a portfolio.”

Wagner manages the Gold Bullion Strategy Fund (QGLDX), which began in July 2013 as the first mutual fund that allows retail investors to participate in the daily price changes of gold bullion. He says geopolitical events around the globe sparked increased queries from advisors and investors about gold and helped the fund pass the $50 million asset plateau at its one year anniversary.

“People are looking for new ways to diversify their portfolios,” Wagner says.


A major factor that could determine how gold performs through the end of 2014 is the Federal Reserve’s monetary policies.

Grubb of the World Gold Council argues that with interest rates not rising to levels that were predicted heading into the year, gold exposure is more attractive.

“Gold, like other metals, has no coupon and therefore an investor is losing less yield by investing in gold compared with other assets when interest rates are low,” Grubb explains. “Gold is historically strong when the dollar is weak.”

Janney’s Luschini counters that because gold does not pay interest or a dividend, holding the commodity becomes much less advantageous.

“When we had negative real interest rates, there was no cost to carry gold,” says Luschini, who has been Janney’s chief investment strategist since 2005. “Now that yields have come up somewhat … it does become costly to hold.”

Luschini acknowledges that while he does not recommend gold as a short-term strategy, setting up a long-term plan could have some advantages.

“There may be value holding gold in a three-to-five-year period simply as insurance,” he says.

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