BUYER BEWARE: PHYSICAL GOLD AND OTHER PRECIOUS METAL COMMODITIES
- Kelly Kranstuber
- Jun 8, 2022
- 5 min read
Each morning when I get to my office the first thing, I do is tune the television to Fox Business. I’m not using Fox Business to provide any kind of research or decision-making; I simply use it as it is intended which is for entertainment and informational purposes only. Normally it is just background noise while I go about my day but I do occasionally tune in to my favorite show, Making Money with Charles Payne. Out of all the shows on Fox Business from opening bell to market close, I find Charles to be very well-articulated and probably the most realistic and educated of all the Fox Business hosts. But one thing Fox, CNN, CNBC, and the other 24-hour news networks have in common is that they would like the average person to believe that the world is coming to an end. Between talking heads arguing about the complete economic and social collapse of our society, we get the commercial that tells the us the only thing that will save us all is buying gold from Fancy Name Capital. I would like to share five reasons why I disagree with that and send a warning, especially to those nearing or already in retirement, to steer clear of these “investments” and stick to the plan you and your financial advisor have put together. If you have not had a conversation with an advisor about retirement and investment planning, please schedule a meeting with us.
Basically, Zero Federal Regulation
I tend to be perfectly at ease with as little federal government regulation in our lives as necessary. However, I welcome government organizations like the SEC when it comes to protecting investors from scammers, charlatans, and snake-oil salesmen. Physical gold, silver, platinum and other precious metals are not securities. The industry is not regulated by the SEC, FDIC, or backed by the full faith of the USA. They are regulated by Federal Trade Commission (FTC). The FTC is the organization that is tasked with regulating basically anyone selling anything. They are notoriously understaffed and have an incredibly difficult time trying to police physical gold and silver schemes. This lack of regulation has made the physical gold, silver and other precious metals industry a hotbed for not so ethical business practices. Boiler room schemes, targeting vulnerable age groups and making it as hard as possible to recoup your investment after you are in are just some of the unethical and sometimes illegal activities within this industry.
Liquidity
Physical precious metal dealers will tell you your investment is completely liquid! Whenever you want to get out, they will gladly sell your investment often within 72 hours. But, there’s a catch…If you need immediate liquidity, you will likely never get the fair value of your investment back in cash. This is a point where the dealer has leverage over you and whatever situation you might be in. Just like any old business negotiation, the one who is the most desperate has the most to lose. Because gold and other precious metals are simply commodities like rocks, lumber, or oil their value is only worth what the buyer is willing to pay. If the dealer is buying back the precious metals they sold you, they will give you the lowest possible offer to make a larger spread when they sell it to the next consumer that comes along. The best way to get the highest price for your precious metals is to sell it on the open market yourself. This involves more time, skill, knowledge and know how then most people care to invest their time into. Another important note about precious metals and liquidity is that it is not an income-generating asset like stocks and bonds. It is not a good investment for someone that needs to generate income from their investment or is taking regular distributions to meet income needs.
Investment Returns
The returns on gold and other precious metals are entirely based on their price appreciation. With all investment returns, time is on the side of the investor. Typically, the longer someone has to hold their investment the higher return they will see over someone with a shorter time to invest. But if I had to choose an investment from the previous 30 years, I would take Large-Cap stocks 1639% of the time over gold or silver. The chart here shows the 30-year returns of the Total Return Stock Index (BLACK) vs. Gold (YELLOW) and Silver (GRAY). The Total Return Stock Index is the return of Large-Cap stocks assuming all cash payouts, including dividends, are reinvested. A $10,000 gold investment made in 1992 would be worth approximately $54,000 today while a $10,000 investment in Large-Cap stocks in 1992 would be worth approximately $174,000.
“BUT WHAT ABOUT DURING SHORT TERM VOLATILITY AND MARKET UNCERTAINTY!” -Screams the gold dealer. I will entertain that with the chart shown here. Keep in mind this is through one of the most uncertain times of our lifetime (COVID + current market situation) and I am still buying and holding the S&P 500 rather than running to precious metals.
Dates: January 1, 2020 – May 24, 2022
Returns:
Total Return Stock Index (PINK) = 24.25%
S&P 500 (PURPLE) = 26.77%
Dow Jones (GREEN) = 21.39%
Gold (ORANGE) = 21.85%
Silver (BLUE) = 22.24%
Hidden Fees
The return charts above do not even include the hidden or “not so discussed” fees and that come along with buying physical gold and other precious metals. If you hold physical gold in an IRA for example, the gold will be purchased through a dealer and sent to a custodian where you will be charged fees for storage and insurance annually. The dealer and custodian will likely charge maintenance fees and don’t forget the markups, commissions and transaction fees associated with buying and selling the commodity. An example of this: You want your gold dealer to sell $100,000 of gold bullion you own. The dealer might charge a sales fee of 15% to cover “marketing and listing costs” so you are stuck paying $15,000 dollars to sell. In contrast, if you have $100,000 worth of an S&P 500 Index fund with Whitaker-Myers Wealth Managers and want to sell $100,000, it costs you $0 in fees.
Volatility
Precious metals are volatile. In fact, gold has about the same volatility as the S&P 500. With regards to possible returns, according to historical data, it would be more prudent to take a similar amount of risk investing in the S&P 500 with a chance of much higher returns than gold.
These are just 5 reasons why investing in physical gold and other precious metals can be a dangerous and expensive endeavor. Alternative investments from stocks, bonds and cash can be something that might benefit your portfolio but we would not recommend large portions of your total portfolio be allocated to these alternative investments. Also, before looking to gold and precious metals do some research or talk to us at Whitaker-Myers Wealth Managers about REITS or broad based commodity ETFs. These alternative investments achieve the diversifcation benefit you desire without the hidden fees, lack of liquidity and oversight and general unfamilarity that can make investing dangerous for the uninformed. If you do feel like you need to have gold, consider a gold ETF instead of physical gold which your Financial Advisor can discuss with you. It will be less expensive and easily liquid for the fair market value at the time you sell. Before making any investment decisions you should speak with a professional about the risks, fees, tax implications and other information necessary to make an informed decision.
