Why advisor education is key to gold ownership

Study highlights lack of investor knowledge while advisors question whether asset class is the golden inflation hedge it's cracked up to be.

They weren’t kidding when they said an education is worth its weight in gold.

According to the advisor edition of State Street Global Advisors’ Gold ETF Impact Study released Thursday, a lack of financial knowledge is the top reason investors don’t invest in gold, with more than a third indicating they don’t have the yellow metal in their portfolio because they don’t know enough about the ways they can invest. The study said only 41% of investors understand what influences the price of gold, compared to 75% of those who own gold in their portfolios.

Advisors’ role as educator proved especially critical when it comes to investing in gold ETFs. The survey showed nine out of 10 (91%) investors who own gold ETFs were informed by their financial advisor about the different ways to invest in gold.

State Street Global Advisors conducted the national survey among individual investors from March 24 to April 19 from a sample of 1,000 adults over 25 years old who have investible assets of $250,000 or more.

“Investors have good instincts about where — and when — to get objective advice. But it’s likely they will need even more guidance to achieve their financial goals as markets continue to react to higher interest rates, lower consumer sentiment, and stubborn inflation,” Allison Bonds, head of private and independent wealth management at State Street Global Advisors, said in a statement.

According to the study, 89% of investors surveyed who have a financial advisor and hold a gold ETF in their portfolio say their financial advisor explained the benefits of having gold in their investment portfolio, compared with 35% of all advised investors. Meanwhile, 83% said their financial advisor recommended gold for their long-term investment portfolio, while 55% said their financial advisor recommended gold as a short-term investment given current markets.

The SPDR Gold Trust has returned 4.4% year-to-date.

Notably, both advised and self-directed individual investors holding gold ETFs proved to be more likely to have investible assets of $500,000 or more (82%) than those investors who do not hold gold ETFs (64%), according to the study.

Laurie Humphrey of Granite Financial, part of Osaic, says a simple search of the internet provides insight as to why there is lack of knowledge, and even confusion, around investing in gold.

“Lists of pros versus cons and conflicting recommendations that ‘everyone should invest in gold’ and ‘why gold isn’t right for every investor’ abound,” Humphrey said. “Working with an investment or financial advisor that understands an investor’s goals and risk tolerance can provide educational growth and confidence in the investment of gold.”

NOT SO GOLDEN RULE

Despite the survey results, not all advisors are sold on the benefits of adding gold to their clients’ portfolios. Some dislike the fact that gold does not pay dividends, while others question its ability to truly hedge against inflation.

David Demming, the founder and president of Demming Financial Services Corp., for example, uses gold only marginally, putting it in what he calls an “eclectic” asset category.

“Gold is an uncorrelated asset that can go up and down regardless of events versus a negatively correlated asset. We hold modest positions through the First Eagle Global fund,” Demming said.

Nicholas Bunio, certified financial planner with Retirement Wealth Advisors, generally avoids recommending gold to his clients, primarily because of questions about its inflation-fighting capabilities.

“It’s actually more of an investment since it’s used in electronics, jewelry and such. Or it can be used in the short term during a serious economic crisis, like in 2008,” Bunio said. “But from an inflation hedge perspective, it’s actually lagged over the last few decades. I remember hearing stories from 2009 and 2010 where gold bugs felt it would reach $4,000 an ounce in a few years. Here we are almost 15 years later, and it’s barely reached $2,000 an ounce. And it almost hit $2,000 back then, too.”

Similarly, Jonathan Swanburg, president of TSA Wealth Management, doesn’t advocate for gold in client portfolios, saying that historically the metal simply doesn’t make its case as a hedge against rising prices.

“Gold hit an all-time high in August of 2020. Despite three years of notable inflation since then, gold lost value,” Swanburg said. “If you go back to 1980, gold was roughly $800 per ounce. Since then, it has climbed roughly 2.5 times while CPI is up approximately 4 times.”