A gloomy market outlook is making gold shine bright, but financial advisers are divided as to whether it deserves a place in most clients' portfolios.
As of Jan. 23, no equity fund category other than the bear-market fund category had better year-to-date returns than the specialty precious-metals category (up 1.77%), according to Morningstar Inc. of Chicago.
The category, which is made up mostly of funds that invest in gold producers, had a one-year return of 28.26% and a three-year annualized return of 30.58%.
Exchange traded funds that provide investors more direct access to the gold market also continue to do well.
For example, the $16.83 billion streetTracks Gold Trust (GLD), offered by State Street Global Advisors of Boston, was up 6.59% year-to-date as of Jan. 23, according to Morningstar.
The ETF — shares of which represent one-tenth of an ounce of gold bullion at current market prices — had a one-year return of 36.84% and a three-year annualized return of 27.17% through Jan. 23.
Some advisers see no reason why gold investments should be any less attractive in the future.
Gold Trust was a winner for clients, but Financial Advantage Inc.'s J. Michael Martin cut back clients' exposure to the ETF to 5% of their portfolios as a result of annual re-balancing. That doesn't mean he thinks gold will falter this year, said Mr. Martin, president of the Columbia, Md., firm, which has $260 million in assets under management.
"I would almost like to have a bigger position," he said.
Mr. Martin is taking a wait-and-see approach before he dives all the way back in, but he thinks gold will continue to outperform.
One reason is that other countries will have to cut interest rates, just as the Federal Reserve has done, if they want their economies to stay competitive, he said.
Such a race to the bottom will fuel inflation worldwide, and gold is a great hedge against inflation, Mr. Martin said.
The continued outperformance of gold investments, however, has Jeff Feldman, president of Rochester Financial Services, worried that such investments may be overvalued. The Pittsford, N.Y.-based firm has $100 million under management,
As a result of that concern, Mr. Feldman said, he isn't adding to client holdings in the $1.11 billion American Century Global Gold Fund (BGEIX), offered by American Century Investments of Kansas City, Mo., or the $984 million U.S. Global World Precious Minerals Fund (UNWPX), from U.S. Global Investors Inc. of San Antonio.
But he isn't cutting back exposure to those funds either, he said.
Some advisers, however, don't see the point of owning any gold investments — even though their clients may be asking for them.
"Clients are asking for [gold] in part because many investors tend to chase whatever is hot," said Charles Lieberman, strategist and chief economist with Advisors Capital Management LLC, a Paramus, N.J.-based firm with $275 million under management.
Investors don't need to own gold to have a diversified portfolio, he said.
"We tend to think of gold as inherently speculative," Mr. Lieberman said. "We have no use for it."
Neither does Lewis J. Altfest, president of New York-based L.J. Altfest & Co. Inc., a firm with $550 million under management.
"I've never used it," he said.
Mr. Altfest isn't tempted to now.
There are other ways to hedge against a recession, if indeed a recession is coming, he said.
For example, Mr. Altfest said, he would rather invest in oil-related stocks, though, he said, he thinks they may be too pricey at the moment.
The debate about investing in gold, however, isn't likely to go away anytime soon.
On the first day of trading this year, gold futures soared more than $20 to trade at their highest level since 1980. Prices have fluctuated since but remain historically high.
Deciding whether to invest in gold can be a tough call for investors who are fearful of recession — a call made all the more difficult when advisers who recommend having some exposure to gold can't even agree on how best to get that exposure.
For example, Mr. Martin favors gold ETFs over mutual funds, he said, because mutual funds offer only indirect access to the gold market via gold-producing stocks.
That the fortunes of many gold-mining companies are tied to regional politics is problematic, he said.
On the other hand, an actively managed mutual fund that invests in gold stocks should be able to provide returns in excess of the gold market's, Mr. Feldman said.
David Hoffman can be reached at [email protected].
