Make Sure You Know What You're Doing Before You Invest In Gold

A lot of financial advisors have suggested investing in gold lately, since the U.S. economy seems headed for the crapper and gold tends to increase in value as the dollar plummets. And a lot of people seem to be following that advice, because gold is up above $750 an ounce now, “its highest level since 1980,” says SmartMoney. But gold investments can change value quickly and can be even more difficult to predict than regular investments, so don’t go all Scrooge McDuck on the gold hoarding.

Gold’s prospects can rise and fall quickly. And, if you’re like most investors, you probably don’t have that Ph.D. in economics that will help you predict inflation and make a gold fund worthwhile. “The economy can always blindside you,” says David Yeske, co-founder of wealth management firm Yeske Buie in San Francisco. “Trying to predict how certain sectors will perform is almost impossible. I don’t like making narrow bets like that.”

SmartMoney suggests you’re probably “better off in a broad-based commodities fund or with a low-cost equity offering that’s run by a seasoned stock picker.” If you do decide to invest in gold, make it no more than 2-10% of your portfolio, and consider looking for an option you can get into and out of quickly.

“Is Gold a Safe Haven for Your Portfolio?” [SmartMoney]
(Photo: Getty)

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  1. Jozef says:

    I buy gold. Not as an investment, though, but as long-term savings. I do have a stock portfolio, IRA and a checking account, but instead of a savings account I put all money that I don’t need to be liquid into physical gold. Over the long term, I believe this will provide the greatest safety for my savings, despite no interest attached to it. In addition, given that my gold purchases are being incremental and most likely over a very long term, the short- and mid-term price swings shouldn’t affect me much. The main reason I wouldn’t consider a savings account or investment funds is that they are largely denominated in dollars, which are more volatile in the long term than gold.

  2. Sia says:

    I hadn’t even thought of looking into gold. I, being Canadian have been buying actually some American currency. In my point of view, I don’t have much to lose. What do you think about buying American currency. I would appreciate your commentary. Thanks

  3. Murph1908 says:

    @Sia:
    When Japan and the Yen was taking a beating a few years ago, I considered buying Yen. You gotta figure an economy like Japan’s would recover. Just like the US economy. The dollar won’t be weak forever. If it were as easy for a Yank to buy Yen as it is for a Kanuk to buy a greenback, I might have actually done it. I’d be looking at a pretty heavy profit right now, with the Yen back up and the dollar in the crapper.

    I have also considered buying gold. Real gold that I can keep in a safe, not a document stating I have gold. If disaster or terrorism or other event devalues our currency and wipes the economy, gold, medical supplies, fuel, food, and ammunition will be the commodities you can bargain with. I have not yet started building my bunker yet, though. =)

  4. hypnotik_jello says:

    Investing in currency exchanges in not a very good long term strategy. Yes, you can make money trading currency pairs on Forex, but that’s mostly in short term (less than 7 day) trades.

  5. Dibbler says:

    I guess my take on this is to look at the key words in the article “its highest level since 1980,” which to me says that gold is a bad investment because it took gold 27 years to break even with 1980 prices. Stock market gets you around 10% a year and gold takes 27 years to get you a 0% return? Unless the dollar completely collapses, I don’t see gold as a “great” investment.

  6. no name says:

    Is it wrong that this reminds me of Auric Goldfinger?

    Well that and those Monex commercials.

  7. Beerad says:

    @Sia: My take on investing in foreign currency? Don’t seek your advice from anonymous blog-posters. If Consumerist commentors are where you look to for major investment advice, you’re in trouble anyway.

    That being said, why wouldn’t you just invest in a nice stock of some company you like? Much easier to find a stable growth company than to interpret the future of global economic trends.

  8. Shadowman615 says:

    @Murph1908: It’s most likely a myth that gold will have any more value than other commodities in the event of an economic meltdown. This historically has not been the case.

  9. anatak says:

    @Dibbler: I noticed that too… not quite the statement needed to get people to get up and invest in gold. Which, by the way, is a terrible investment, worthless in a disaster, and unless its hanging around your neck, an all-around bad place to put your money.

    Another objectionable statement: “And a lot of people seem to be following that advice…” A lot as in what? 8, 10, 12 people?

  10. anatak says:

    @Shadowman615: You’re right. In the mini-meltdown of hurricane Katrina, bottled water was just about the most valuable commodity. And the bottles were not made of gold.

  11. Nemesis_Enforcer says:

    Soo does that make people who “invest” in gold teeth smart investors..LOL!

  12. zolielo says:

    @Shadowman615: Yup, it is too hard to value on the spot in an emergency situation plus even in non-emergency situations it is a pain to convert into currency.

    Who does not have a Phd in Econ. ;)

  13. speedwell (propagandist and secular snarkist) says:

    I was left a small inheritance of a few tens of thousands of dollars several years ago. I didn’t want to put all that money in the bank and sit on it, because I was aware of the declining value of the dollar. I didn’t want to buy stocks because I know next to nothing about them. I know that even if the price of gold falls, you still have the gold and it will likely rise back up. So I put the money into gold bullion. Gold started to rise.

    Last year, some creep totaled my car. I sold some gold, bought a modest replacement car with the proceeds, and noticed I still had approximately the same number of dollars left that I started with. Worked out basically the same as keeping the money in the bank the whole time, and getting a free car on top of it.

  14. UnStatusTheQuo says:

    My solution to the declining dollar wasn’t gold, and probably won’t be. Forex trading against it, however, has been modestly successful, especially as of the last 2 months or so.

  15. Myron says:

    As an investment, gold has a high volatility (risk) vs its return. However, it does tend to have a low correlation vs the stock market. That means its ups and downs are not in lock step with the stock market. So, if you can put up with the volatility, a little gold in your portfolio can juice returns and actually reduce risk.

  16. Daniel-Bham says:

    Ummm… Gold for like the past 150 years has averaged a rate of return less than inflation – so it seems like a dumb long-term investment to me.

    The fact that gold prices are up and constant radio commercials are harping on the ‘value’ of gold just seems like people who were dumb enough to get in on it a while back are trying to find suckers to offload their portfolio to since it is ridiculously hard to sell…

  17. BigNutty says:

    Regarding Daniel above, that is exactly what I did after holding on to some Gold for years. I have already sold it with a nice profit. I just didn’t think I was going to have to wait so many years to unload this stuff.

    I am still holding on to my gold coins which is a completely different animal.

    Live and learn.

  18. swalve says:

    Great advice- always buy at the top of the market.

  19. Jesse in Japan says:

    @Daniel-Bham: Your point is completely irrelevant because the value of the dollar was pegged to the price of gold until the Nixon administration. An ounce of gold was worth 20 dollars in 1840 and 20 dollars in 1920. It was re-valued at 35 dollars per ounce in 1934 and remained at that price until 1968. Since 1968 gold has gone from 35 dollars an ounce to the current level of 750 dollars an ounce, which is, I believe much better than inflation.

    Because gold can very easily and quickly be turned into cash, it makes a good way to round out an investment portfolio, but I wouldn’t want to put all my money into it. Gold has been all over the place these past couple of decades.

  20. XopherMV says:

    A lot of the run up in gold has already occurred. It’s currently at $763 per ounce. If you bought gold today, it would have to increase further from it’s already lofty prices to make it profitable for you. And it’s not likely to have anywhere near that kind of significant run up anytime soon.

    To really cash in on the current price of gold, buy shares in the companies that mine gold. Some of these companies can mine gold for less than $0, due to selling the additional minerals extracted, such as copper. The mining companies can then sell that gold at the current astronomical market prices. Mining at less than $0 and then selling for $763 per ounce makes for pure profits with little risk. Even if the gold price drops to $500 per ounce, they’re still making money.

    NXG is highly rated. But, check out the various companies yourself.

    [caps.fool.com]

  21. Jesse in Japan says:

    @XopherMV: They would have to dig up a hell of a lot of copper to cover the cost of mining. Gold doesn’t just grow on trees, you have to go deep down into the earth to find it. And the process of extracting pure gold from the mass of rock and other metals that comprise ore is a very expensive process.

    Also, your post sounds suspiciously like an advertising pitch.

  22. zolielo says:

    Fake gold firms have also been historically problematic for investors. Be careful.

  23. kwsdurango says:

    For dollar hedges – consider dollar denominated commodities, like oil futures, or just as good, companies that extract oil or provide equipment supporting the extraction of oil. Stocks of foreign companies in countries with strong economies and currencies. While some of them are losing export business to the US as a result of a weak dollar (primarily European businesses), others, like Brazil, India, China, etc. will continue to do well.

    The dollar is going to continue to lose value simply because the Fed will continue to lower rates in order to protect (in the short term) the US housing market and broader economy. In the long term, the dollar could continue to lose value because foreign investors who own dollar denominated bonds will sell them because the yields are too low – which increase the dollar supply. Eventually this should cause inflation which will hopefully trigger the Fed to raise interest rates to tighten the supply – but it’s going to be a while.

    In the mean time, I’m happy with my “natural resource and energy funds” and my “international funds.” As well, I’m busy learning about other dollar hedges.

  24. XopherMV says:

    @Jesse in Japan:

    In the second quarter of 2006, Northgate Minerals was able to mine gold at the cost of -$44 per ounce. That is because they extract millions of pounds of copper while searching for ounces of gold. AND, that includes the cost of purifying the gold.

    As for the “advertising pitch” claim, that’s laughable. This WHOLE TOPIC is an advertising pitch.

  25. Jesse in Japan says:

    @XopherMV: That sounds more like a copper mine to me.