Personal Finance

Gold is a hot investment. Here's why you should resist the urge to buy during the market selloff

Key Points
  • Gold is coming off its best week since 2016 and was recently trading at its highest levels in seven years. 
  • The metal is often turned to as a "safe haven" during stock market turmoil because it doesn't typically move in tandem with stocks.
  • Financial advisors recommend that long-term investors avoid a knee-jerk reaction to sell out of stocks for an alternative. 
A gold bar is wrapped in a financial newspaper.
GSO Images | Getty Images

When the stock market goes haywire, gold often becomes the "gold" standard in the eyes of everyday investors.

True to form, gold just came off its best week since 2016, as fears around the global spread of the coronavirus led to a sharp selloff in the stock market and nudged investors to retreat to what they perceived as a safe haven.

Gold prices were trading at their highest levels since 2013 earlier this week, though have fallen a bit since Monday. 

However, investors should resist the urge to park money in gold, financial advisors say.

Gold prices could break above $1,700 if uncertainties escalate, says UBS
Gold prices could break above $1,700 if uncertainties escalate, says UBS

While some advisors advocate allocating a sliver of an investment portfolio to gold, investors should wait until the dust settles from the recent market rout to buy, they said.

"The time to do it, at the very latest, was probably two weeks ago," said certified financial planner Dennis Nolte, a financial advisor at Seacoast Bank in Winter Park, Florida. "Now is not the time to initiate any new positions in anything that's gone up so fast."

Major U.S. stock market indexes like the S&P 500 and Dow have each shed more than 20% of their value from highs reached in February, officially dipping into bear-market territory.

The Dow closed 2,352.60 points lower, or nearly 10%, on Thursday for its worst drop since the 1987 "Black Monday" market crash, when it collapsed by more than 22%. The index is down nearly 26% since the beginning of the year.

These market gyrations have occurred as the number of coronavirus cases outside China, where officials believe the virus originated, have increased sharply.

More than 100 countries have confirmed cases, which now total nearly 128,000 globally. The situation is worsening in the U.S., with New York, California and Oregon declaring states of emergency.

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The market turmoil has led to a surge in interest in gold. The SPDR Gold Shares ETF, for example, was up around 10% year-to-date earlier this week, and is up 20% from the same time in 2019. (It was up more than 3% year-to-date as of market close Thursday.)  

Online searches for the term "gold" were at an all-time high today, according to Google Trends.

"We have a variety of factors here: We have the emergency rate cut [by the Federal Reserve], we have the flight to safety in bonds, and then we have no buyers coming into the S&P anywhere," Danielle Shay, a trader, said Friday in an interview on CNBC's "Trading Nation."

Guided by panic

Selling out of stocks to fund a gold purchase wouldn't be wise for everyday investors because it's a move guided by panic, said Charlie Fitzgerald, CFP, principal and financial advisor at Moisand Fitzgerald Tamayo in Orlando, Florida.

"During moments like this, people become speculators," Fitzgerald said. "They start flipping coins."

"They're trying to see what the next shiny object is, which doesn't play out well when there's emotion involved," he added. "It won't generally be a good result."

The same rationale applies not just to gold, but to other alternative assets that tend not to move in tandem with the stock market, advisors said.

Fitzgerald doesn't allocate any of his clients' money to gold or other alternatives. Gold, he said, will tend to earn roughly the rate of inflation over the long term; stocks, on the other hand, are likely to generate much more wealth for investors.

For example, $100 invested in the stock market now would yield roughly $386, in today's dollars, two decades from now, according to Fitzgerald, whose analysis assumes a 3% inflation rate and historical stock returns. The same amount of money invested in bonds would generate about $135.  

A gold investor, however, would have about the same purchasing power as 20 years earlier — $100.  

Be 'contrarian'

Nolte typically allocates about 3% to 6% of a client's portfolio to gold, as way to reduce an investor's exposure to stock- and bond-market volatility.

However, Nolte wouldn't put more money into gold for clients today since the price has run up so much in a short period of time.

In the current market situation, long-term investors would do well to stay the course and stick to their investment plan rather than make wholesale changes to their portfolios, said Fitzgerald.

Stocks tend to recover their losses fairly quickly, he said.

Market "corrections" — selloffs of between 10% and 20% — since World War II have resulted in an average decline of nearly 14% and taken about four months to recover.

Bear markets — selloffs of more than 20% — over that period have had an average drop of more than 30% and taken two years to recover.

In fact, panicking and selling out could mean investors didn't have the risk appetite to be in stocks to begin with, Fitzgerald said.  

"To be an investor, you have to be a contrarian," he added. "When people are running for the door, it's usually a good signal it's a great time to buy."