The Misconception About Gold

/ Percension Wealth Advisors, LLC/

Every so often someone asks me about gold and whether they should own it. Here is a look at the price of gold over the past 10 years:

(chart created in stockcharts.com)

You will notice a big run-up in the price of gold post-recession, from 2008 to 2011. Then the price fell -40% over the following years and has floundered around since then. Beyond the fact that we do not invest in currencies or precious metals (at least yet), gold lacks the one thing that matters most to us, which is a rising trend. The price of gold has been a mess for nearly 7 years.

So then why do people want gold?

Many consider gold to be a hedge against inflation. As prices rise throughout the economy (inflation) the theory is that the U.S. dollar becomes less valuable. If the dollar is less valuable, that means it requires more dollars to buy the same goods and services than it did in the past. This is what it means to lose "purchasing power".

This is where gold comes in.

The perception is that buying gold hedges against this risk that the dollar will become less valuable. Because gold is a hard asset and the oldest form of currency, it is believed to have a more stable value than the dollar, which fluctuates based on a variety of factors like stock market conditions, international trade and Federal Reserve actions. Using this logic, the "hedge" is that when the prices of all these other things in the economy eventually peak and reverse lower, gold will thrive.

In reality, it is really just a hedge against how we think others will react in times of economic fear.

The fear starts with feeling that real estate values and stock market prices will fall (for whatever reason). This stems to fear that the economy will fall into recession. Finally, because the U.S. Dollar is intrinsically linked to the economy, there is fear that the dollar will collapse. This all leads to the notion that buying gold might be a good idea because if the dollar dissolves the nation will be left with gold as its currency.

That entire thought process is flawed because the reality is that gold is an asset, not a currency. No one buys gold with the intent of transacting goods and services. They buy it because they think it will become more valuable should everything else they own plummet in value. The entire essence of thinking something will rise in value is based on believing that someone else will want it and be willing to pay you more for it. To that end, those who own gold are doing so as an investment, not as a means for bartering the exchange of goods and services.

If you consider buying gold at any point, ask yourself why...

  • Because you can touch/feel it? There are many physical assets you can hold that may or may not rise in value, from antiques to baseball cards to classic cars.
  • Because someone on TV said to buy it? By now I hope you know how we feel about taking advice from the financial media.
  • Because you will earn an immediate return on it? Actually, no you won't. Gold does not pay a dividend like a stock and it cannot be rented out for income like a house can.
  • Because you already own a lot of stocks? I would be willing to bet you lunch that if we looked at the distribution of your assets that there is probably something you do not own that is as good as, or better than, gold as a long-term investment.

I realize I sound somewhat negative when it comes to gold, but I am more so annoyed about the misconceptions that exist.

In The Market...

The S&P 500 lost -0.2% this past week. Let's look under the hood:

(price data via stockcharts.com)

Last week's loss snaps the 5-week winning streak for the S&P 500, which had gained +4.6% over that span. Most sectors were negative as the overall market struggles to eclipse the previous S&P 500 record high from January.

This comes as no surprise. I felt the market would run into some headwinds right now, as I wrote about in recent weeks. We sold our Health Care sector position (XLV) last week, as it appeared to be sharing in the struggle to get above its previous peak. Take a look:

(chart created in stockcharts.com)

The risk/reward slanted in the favor of selling this fund and capturing the nice gain we had earned in the prior weeks. The price ran back up to the previous high just as we anticipated it might. But it appeared to lose a bit of momentum when it got there, so we felt it was wise to sell and reinvest the proceeds into another area of the market that might have more upside. I normally do not go into too much detail recapping these types of decisions, but because most accounts owned this Health Care fund it is worthwhile to share our thought process.

In Our Portfolios...

What's New With Us?

I posted another short video on our "Video Q&A" page, which discusses our investment beliefs. Take a look:

Have a great week!

Brian E Betz, CFP®
Principal

New Tax Laws Might Influence How You Pay Your Mortgage

/ Percension Wealth Advisors, LLC/

Should you pay off your mortgage early? The new tax laws might warrant it.

If you normally itemize your tax deductions each year, you do so because the sum of those itemizations exceed the standard deduction amount that the IRS otherwise provides as the alternative. For instance, in 2017 the standard deduction was $12,700 for married couples. If you were married and had more than $12,700 in itemized deductions then you itemized. If not, you claimed the standard deduction.

In the tax bill that Congress passed earlier this year, the standard deduction doubles from $12,700 to $24,000 for married couples and $6,350 to $12,000 for single taxpayers. This is effective starting this year. It means fewer taxpayers will itemize their tax deductions.

This is where your mortgage comes in.

For many taxpayers, the biggest deduction is the interest paid on a home loan. For some taxpayers it is the only itemized deduction and has historically exceeded the standard deduction by itself. Now, because that threshold has doubled the tax benefits associated with paying mortgage interest will go away if the total interest paid falls short of the standard deduction amount.

Let's use a couple examples...

Example 1:

  • You are married
  • Your mortgage balance is $500,000
  • Your mortgage rate is 4.25%
  • Therefore, the approximate interest you will pay in the year is ($500,000 x 4.25%) = $21,250

Result: Assuming you have no other itemized deductions, you would take the standard deduction because $24,000 is greater than $21,250.

Example 2:

  • You are single
  • Your mortgage balance is $275,000
  • Your mortgage rate is 4.50%
  • Your total mortgage paid would roughly be: ($275,000 x 4.50%) = $12,375

Result: Assuming you have no other itemized deductions, you would continue to itemize because $12,375 is greater than the new standard deduction amount of $12,000 for single tax filers.

As mentioned, the big assumption in both examples is that there are no other itemized deductions. If there are, such as if you make large charitable contributions, then you will likely continue to itemize.

For the married couple in example 1 above, there is no longer any tax benefit related to holding a mortgage. It is costlier to keep paying interest (in their case, 4.25%) if they have the extra funds to pay off their home loan sooner than the loan term.

There are other variables too. Such as..

  • If you are able to leverage your money – meaning make more on your cash than what you pay in interest – then you may prefer to hold a mortgage and invest your excess cash instead.
  • The tax laws could change again in the coming years and the standard deduction could be reduced.
  • You might not have additional itemized deductions this year, but you could in future years.
  • You might not have the extra funds to increase your mortgage payments in the first place.

The bottom line is, if you own a mortgage and have historically itemized your deductions it is at least worth assessing whether you will continue to itemize in the future. If not, consider a plan that involves paying off your mortgage early.

In The Market...

The S&P 500 gained +1.5% this past week. Let's look under the hood:

(price data via stockcharts.com)

It was a nice week across the board, as nearly every sector was positive. Health Care (XLV) was up +3.0% and is a sector fund that is now owned within most client accounts. Health Care looks like it could be on the cusp of a nice rally in the coming days/weeks. Technology (XLK) had a nice week as well (up +2.3%) and is a sector that we added to some accounts.

It was an encouraging week, but one that followed two-straight weekly declines for the S&P 500 index. Looking more broadly the overall market continues to see-saw. The S&P enters this week nearly -4% below its previous high, which again is the price level we need it to burst through in order for the rally to resume. Right now the market is coming up on six-straight months of stagnation.

On the bond side, long-term Treasuries, Corporate bonds and Preferred Stock were all up more than +1.0%. We added Preferred Stock (PGF) to many accounts and swapped out our Municipal bond fund (PZA) for Preferred Stock within any IRA accounts that owned muni bonds. The tax-free nature of the interest earned on municipal bonds does not make them as conducive to be owned within IRA accounts, which is why we made the swap to a more growth-oriented bond fund in Preferred Stock. As a reminder, given the characteristics of Preferred Stock we treat it as a bond fund for our stock vs. bond allocation needs.

We are back to being nearly 100% invested as a result of these moves.

In Our Portfolios...

What's New With Us?

My family had a nice trip to Utah for the 4th of July. It is nice to be back for a full week as the market nears its historically most volatile time of the year.

Have a great week,

Brian E. Betz, CFP
Principal