As we continue to roll into the new year and the market volatility appears only to be strengthening by the day, you may be wondering if gold is worth investing in during these turbulent times.
Well, the real question maybe is why are the markets so turbulent today? There are a few reasons, of course, but the big reason is because of the coming higher interest rates and deleveraging of the Federal Reserves balance sheet. But, the why behind the higher interest rates is what's very appealing to some gold investors today; high inflation.
Gold has forever been the hedge against high inflation. The thinking is that the dollar losses value as inflation goes higher, but it will continue to keep up with inflation, and historically it has pretty well. So, the Fed is currently talking about raising interest rates in the coming month in an attempt to slow inflation but not derail the economic recovery due to the negative effects caused by the Covid-19 pandemic.
So, we know that gold is good when there is high inflation, but do we know if it's good when interest rates are rising? That answer is a little more difficult because the problem is, in the past, when we have had really high inflation, inflation above the 2% or so that the Federal Reserve considers normal and good for the economy, the Fed has stepped in and raised interest rates in an attempt to bring inflation lower and more sustainable. So, that muddies the water a little.
However, data would indicate that in the past, when interest rates have risen and risen rapidly like most expected to happen in 2022, it has performed really well. For example, in 1971, the 1-year T-Bill paid 3.5% and rose more than four-fold by 1980. During that time, gold went from $50 an ounce to $850.
With that said, though, during the 1970s, the years when interest rates rose the quickest, gold jumped the most. And in years when rates stabilized or came down a little, it fell in value.
So, while most expect the Fed to increase rates 4 times in 2022, and maybe only 2 times in 2023, investors that choose to jump on the gold train should keep in mind that 2022 may be great, but the gold fever could fade in 2023.
How can an investor like you buy gold?
Gold is relatively easy to invest in today. You can literally buy gold bullion and store that in your home or bank. Or there are a number of other different investment options that make it really easy to buy and own gold without having to do all that heavy lifting.
For example, there is the SPDR Gold Trust (GLD) which is the top dog in the gold investment game. GLD has been around since 2004, has an expense ratio of 0.40% and almost $60 billion in assets. The fund tracks the spot price of gold using gold bars held in a vault. This is direct exposure without having to haul around the metal yourself. Plus, it's easy to buy and easy to sell when you are ready to move on.
GLD is a little on the expensive side at $170 per share, so there is the iShares Gold Trust Micro (IAUM) which is essentially the same as GLD but trades at about $18 per share. More affordable for investors who are looking to allocate some but not a ton of money to gold. IAUM also has a much lower expense ratio at just 0.15%, but has also only been around since June of 2021 and only has about $1.2 billion in assets.
And finally, we have a little riskier gold ETF option, the USCF Gold Strategy Plus Income Fund ETF (GLDX). This fund is an actively managed ETF that aims to provide gold exposure while also generating income through a gold-covered call writing strategy and collateral interest income. The idea is that the fund owns gold bars and can sell the options for someone else to buy those bars from them. They sell the options and use those proceeds to pay the GLDX investors a dividend. All at the same time, the investors could be benefiting from increasing gold prices. However, I think this fund is better during times when the price of gold is stagnant, not when it has a potential to increase rapidly. This is because if the fund sells an option call and the price of gold meets the option strike price, the fund will have to sell the gold they own or pay a higher price to buy the option back. In both situations, the GLDX investor will not likely come out ahead. But it is an option.
Gold, like all investments, has some risk. But history has shown us that it performs well during big market downturns and during times of inflation. So, I think 2022 will be a good year for gold, and I will probably be owning some in the near future.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
