When it comes to thinking clients, many of them find that they are initially quite enthusiastic about obtaining exposure to physically held gold and other precious metals. What invariably happens is they get into a conversation with their financial advisor and begin to have cold water dumped on their heads in the form of numerous objections. The reaction from many a financial advisor to a client’s burning desire to include gold in a portfolio all too often comes down to one of several unfair responses, like:
• Gold is a dinosaur, a relic of the past, a pet rock…
• Why would you even consider owning an asset that does not pay any sort of yield?
• Gold rings are a great investment in your future, gold coins and bars are a complete waste of your time…
• Even dentists no longer use gold to fill teeth, why would you want to bother with it!
• It’s fine if you want to speculate with your money, but don’t you dare call buying (especially physical) gold investing!
Today we will go through some effective responses to help win over your financial advisor in your plan to acquire some physical gold with a portion of your retirement or investment portfolio funds. It is important to convince your financial advisor in this cause. If you do not, you can be sure that he or she will be constantly watching your gold holdings expenses versus returns and trying to convince you to cash out whenever you are underwater and your stock/bond portfolio mix is having a day in the sun.
Why You Would Want to Enlist the Support of Your Financial Advisor in your Quest for Gold Holdings in Your Portfolio
You and your financial advisor are a team, and if you are fortunate, a seamless one that works well together at that. Many of these professionals can be convinced in theory that gold and the other precious metals provide a hedge against chaotic economic times, inflation, currency devaluation, or volatile stock and bond market performances, even if they believe the yellow metal to be imperfect in practice. The truth is that they will never approve of the fact that your hoped-for physical gold inventory will never earn interest or receive dividends of any kind as would traditional asset classes.
This is why your goal is to convince them to go along with a relatively small allocation to gold, somewhere from five to 25 percent maximum. Once you get them on board with this idea, you will find your client review conversations proceed a whole lot smoother both in times when gold is basking in the glory of its outperforming traditional assets in the middle of a financial crisis or other geopolitical mess as well as when gold is down for the proverbial count temporarily. It will always be difficult to win them over on the idea of physically holding gold though, just because a smart financial advisor will not want you to have to earn still greater price appreciation in your investment just to cover storage and safekeeping fees for the gold.
Here are several good responses you can work on for the big confrontation with your financial advisor on putting a portion of your assets into physical holdings of the yellow metal.
I’m aware that it doesn’t pay dividends, but that’s not why I’m investing in it
First of all, you must be prepared for the credible and intelligent argument they will throw at you regarding the lack of dividends or interest on your physical gold holdings. You can not win this debate on its own merit. Acknowledge that you are not investing in gold to earn a steady return, rather you are interested in owning a worthy hedge against chaotic economic events or runaway rampant inflation. Gold and commodities in general are still considered to be alternative investments. These make a strong pillar in your portfolio, so long as they are not the only such pillar holding up your investments. This is why you diversify into gold holdings, not sell your entire paper portfolio to cash into a tangible yellow metal hoard.
I just need a security in case of a systemic collapse
Do not let your financial advisor tell you that gold is a pet rock only suitable as a hedge for investors who live in a small third world nation. It is true that this is a good category of investor for gold and the precious metals, but anyone who is a considering, reading, thinking person should be concerned about the possibility of a systemic crisis or even collapse even in the developed world. Remember that no empire in world history has lasted forever. In fact, most nations and empires have averaged around 250 years from rise to fall. The U.S. is as close to 250 years now as matters, and the major Western European powers are well past their average life expectancy by centuries already. No financial advisor in his or her right mind will argue with the fact that gold can and does perform well as a store of real value in times of economic and/or political distress.
Hasn’t gold held its value better and/or appreciated more than most any other asset class over the longer term?
This is a constantly debated topic, with neither side ever able to convincingly claim victory and strike down their opponents on the subject of whether gold has outperformed both inflation and the major asset classes of stocks and bonds. This chart below makes a convincing case for owning gold at least since the U.S. (and rest of the world more or less) abandoned the gold standard for the final time in 1972 under then-President Richard Nixon. Look what happened to gold prices in inflation adjusted terms from the early 1970s through the financial crisis of 2008-2009 and everything after:
A simpler way of understanding this argument lies in the value of gold example from one hundred years ago versus today. If in 1917 you owned a one ounce gold coin, its value was then fixed at $20 US dollars. This would buy you a high quality personally tailored suit in New York City or London at the time. Fast forward to 2017, when that same gold coin is worth over $1,100. That price will still fetch you a handsome designer or tailored suit and then leave you something left over for a nice dinner out as well. Has gold held its own value over the past century? The convincing answer is that these numbers do not lie. Has the U.S. dollar held its value relatively well in that time frame? Gold was fixed at $20 per ounce a hundred years ago. Today it rangers in the $1,100 to $1,350 per ounce range. RIP dollar.
More recently, gold has outperformed stocks and bonds in a typical 60 percent/40 percent mix of the traditional asset classes in four out of five years of the Great Recession and financial crisis from 2008 to 2012, as you see in this chart. This is the case whether you compare straight gold holdings to the traditionally mixed 60/40 portfolio or compare a portfolio with a 25% gold component:
As to whether or not it has outperformed stocks and bonds over the longer term, the answer is murkier. It depends on to which stocks and bonds you are referring. There are a number of individual securities whose underlying companies did fantastically well over the decades, such as Gillette, IBM, and General Electric. There are far more corporations and firms that failed, went bankrupt, or never really amounted to much, along with the prices of their stock shares. As far as the S&P 500 itself goes, it is easy to understand the returns on the index comparative to gold over the past century:
What this tells you is that depending on your timing of entry into and exit from U.S. stocks, you might have outperformed gold over the longer term if you were trading the S&P 500 basket or an ETF religiously based upon it. The same is true for gold. Remember though that you are not trying to convince your financial advisor to entirely abandon the traditional two main asset classes of stocks and bonds from you overall portfolio. Instead you only want him or her to agree to let you put somewhere between five and 25 percent of your portfolio funds into physical precious metals.
Can You Name Another Asset That is Not Tied to the U.S. Dollar and Economy?
This is an argument which will leave your poor financial advisor speechless. The answer is almost resoundingly no, with the exception of international stocks and foreign corporate or sovereign bonds denominated in another currency like euros, pounds, or yen. Given the choices of gold or foreign denominated and based assets, most financial advisors will not love the idea of these foreign denominated and based assets as a hedge. Once you show them the inevitable alternatives to a physical gold hedge, they are a lot more likely to cooperate and finally see your point of view.
Then move in for the proverbial kill by asking your financial advisor, “What is going to protect my portfolio during the next financial crisis if I have no precious metals within it?” When they are silent, give them a moment’s pause for maximum effect before delivering the coup de gras with this appropriate final analogy. “If you were a football coach, would you play a team without any defensive line?” Then reassure them that you will not either.