From 2004 to 2011, the price of gold soared from under $400 an ounce to more than $1,900. Then gold turned to iron pyrite, dropping by more than 40% to less than $1,200 in 2013.
“Gold is certainly not correlated to the stock market,” says Andy Kapyrin, director of research at RegentAtlantic Capital, a wealth management firm in Morristown, N.J. But is gold the kind of non-correlated, alternative asset that investors should be holding now?
“I’m not upbeat on gold,” says Kapyrin. “There’s no chance that gold prices will recapture their peak any time soon.”
To Kapyrin, gold is an asset that’s held as protection against “worst possible outcomes,” which has been the case for hundreds of years. “When gold reached its highest price,” he says, “it was largely because of concerns about the United States, the largest economy and largest pool of wealth in the world. Washington seemed to be dysfunctional, and there was a real possibility that the U.S. could default on its debt.”
That didn’t happen so the world’s economy never underwent the consequences, whatever they might have been. “The federal government has appeared more effective lately,” says Kapyrin. “Another debt ceiling deadline came this year and the issue was resolved as a matter of routine. Other factors seem to be positive, such as a housing market that’s stabilizing.” Without such a steep wall of worry to confront, gold prices recently have slid back from an early 2014 climb and now stand a few percentage points higher for the year.
It’s true that the world is hardly worry-free these days. Besides the seemingly endless geopolitical scares around the globe, there are worries about China’s economic growth rate and ongoing fiscal problems in Europe. Even so, Kapyrin is skeptical that including gold as an alternative asset class will benefit investors. “It’s not an ideal hedge,” he says. “In 2008, gold prices fell during the financial crisis.” After first topping $1,000 an ounce in March of that year, gold dropped to around $750 by early December and didn’t reach $1,000 again until September 2009. “Long-term,” Kapyrin adds, “gold is not likely to be an outstanding performer.”
If gold’s non-correlation and potential disaster protection don’t impress Kapyrin, are there any alternatives his firm suggests to clients? “From time to time,” he says, “we’ve been in REITs and broad-based commodities funds. At today’s valuations, though, those investments are no longer attractive.”
Instead, Kapyrin points to “infrastructure master limited partnerships (MLPs)” as alternative vehicles that now make sense. “These include pipelines that transport energy products such as oil and natural gas. We like their business model—they’re essentially toll collectors.” Thus, their profits aren’t pegged to energy prices.
Kapyrin adds: “Today these MLPs yield around 6% while REITs yield about 3.5%. That’s an indication of good value for some MLPs. The MLP tax structure can be an issue so we often invest through exchange-traded notes (ETNs) from creditworthy issuers. The payouts will be taxed as ordinary income so we suggest that our clients hold ETNs in retirement accounts such as IRAs, for tax deferral.”
