Fleece definition (Source: Merriam Webster):
Noun: the coat of wool covering a wool-bearing animal (such as a sheep)
Verb: to strip of money or property by fraud or extortion
The legend of the golden fleece comes from Greek mythology. In the story, Jason is a prince and his father is king. When Jason’s father is overthrown by his evil brother, the new king sends Jason far away on a mission to find the golden fleece, believing the mission is so difficult Jason will never return. Instead, Jason overcomes the odds and returns with the fleece and a new love. Unfortunately, the victory is short lived. Jason’s new love leaves him and he’s struck by a wood plank and dies.
While the golden fleece represents something of immense value it simultaneously represents deceit and tragedy. Could this be an appropriate analogy to the marketing frenzy currently underway urging people to buy gold?
Americans are understandably concerned about the state of our economy, and retirees want to make sure they’re able to maintain their quality of life in their senior years. Gold boosters state gold is a secure store of value and a hedge against a bad stock market, inflation, and bank failures. Let’s examine some key pros and cons about gold:
A hedge but there's no guarantee
Gold is considered a hedge against inflation and a bad stock market, meaning when the stock market goes down and inflation is high, gold tends to increase in value. Russ Koesterich, who serves as Portfolio Manager for BlackRock’s Global Allocation Fund, shares this viewpoint and recommends a “buy” position on gold, but he also states gold is an imperfect hedge.
Predicting the future of financial markets is notoriously difficult. While many indicators point to a difficult stock market ahead, there’s no guarantee the stock market will go down, and there’s also no guarantee that gold will appreciate in value if it does.
A look back at gold’s performance over the last 100 years shows this asset is certainly not a sure thing and is subject to major ups and downs.
If you bought gold at the beginning of 1980, you would have paid $2591 an ounce. 20 years later, the price had plunged to $543.65. Your assets would have lost over 75 percent of their value in 20 years.
Another 20 years later, in 2020, your position would have finally recovered most of its value, hitting $1935, but you’d still have lost 25 percent of the value of your initial contribution.
What if the banking system collapses?
Although our political leaders assure us there is no risk of a banking system collapse, there are clearly legitimate reasons for concern. 2023 has brought several high profile bank failures, including Signature Bank, Silicon Valley Bank, First Republic Bank, and Heartland Tri-State Bank. These failures impacted over $538 billion in assets, and some analysts say the banking system has underlying vulnerabilities that could eventually lead to a contagion. A study conducted in March of 2023 found 186 more banks are at risk of failure.
It’s worthwhile to mention one of the main places people store their gold is in safe deposit boxes at banks. In the event of a bank failure, will you still be able to access the contents of your safe deposit box?
So far, and as a policy of the Federal Deposit Insurance Corporation (FDIC), the FDIC takes over the safe deposit boxes at failed banks and allows owners to access their contents as soon as possible. However, so far banks have not failed en masse. It’s a fair question to ask whether the FDIC is capable of managing a more widespread banking failure where hundreds of banks fail like dominoes?
Coins versus bars
Gold bars are generally closer to the metal’s per ounce price. Coins’ detailed designs result in them being more expensive, on an ounce by ounce basis. However, if your purpose for buying gold is to have a means of exchange in a worst case scenario where both the government and the financial systems fail, then coins make more sense.
Tax treatment
In the United States, gold investments are subject to taxation. When an investor buys gold, there are no immediate tax implications. However, taxes may come into play when the gold is sold. If you sell gold for a profit, you could be liable for capital gains taxes.
The tax rate depends on various factors, including the duration of your ownership and your overall income. Short-term capital gains, typically for assets held less than a year, are taxed at ordinary income rates, while long-term capital gains receive preferential tax rates. It’s important to consult with a tax advisor or the IRS guidelines to understand your specific tax obligations related to gold investments.
Diversification
Investors often consider including gold in their diversified portfolios for several reasons. Gold is viewed as a hedge against economic uncertainty and inflation, as its value can rise when traditional assets like stocks or bonds underperform during challenging economic times. It can provide stability and act as a store of value, helping to mitigate overall portfolio risk.
Additionally, gold is a non-correlated asset, meaning its price movements often differ from those of other investments, enhancing diversification. By incorporating gold, investors aim to reduce the overall risk in their portfolios and potentially achieve more stable, long-term returns.
Conclusion
So is gold investing a scam, or a golden fleece? No. Gold investing is a legitimate financial strategy for protecting yourself from adverse events when used as part of a diversified strategy. However, gold is also not a sure thing and can rise and fall in value unpredictably.
Eric Eisenhammer
Eric is an Asset Protection Specialist. He is co-founder of Legacy Defender Insurance Solutions and holds licenses in Life and Property & Casualty insurance. Eric earned a bachelor's in Finance from California State University, Northridge and a Master's in Public Policy and Administration from Sacramento State.
