All That Glitters…

Gold. For centuries the yellow metal that runs in veins along rock walls has sparked the imagination of men seeking to strike it rich. Even today, investing in gold remains one of the hottest topics of investors worldwide. Gold recently eclipsed $1800 per ounce for the first time as part of its remarkable run over the past few years. I continue to receive lots of questions about investing new money in gold at these loftier prices. 
First, let’s begin with a historical perspective of gold as an investment. Gold prices have risen as follows: 50% over the past 12 months; 25% over the past 5 years; 20% over the past 10 years. With this history of success, gold begins to look like the proverbial ‘sure thing’.    But if we rewind a bit further, you’ll see a very different picture. In January of 1980, gold peaked at $850 per ounce. Had you been a buyer on that date, you would have seen your investment erode 43% over the next three months to $480 per ounce. Even more astonishing, in October of 1999, your twenty-year investment was worth $252 per ounce. 
The purpose of this bit of history is to remind us that gold is far from a sure thing. So before you go piling into gold as an investment, ask yourself these questions:
  • Why am I buying gold? People often invest in gold because they think our world is about to come unglued…a financial or economic Armageddon.   It’s true that both America and many other countries face serious challenges but collapse of the U.S. or world economies is very unlikely. As the world begins to work through these problems, you could see interest in gold fade rapidly.
  • From this point in time what’s more likely to happen first: gold doubling to $3600 per ounce or dropping in half to $900 per ounce? In other words, as gold reaches ever newer highs, the risk of a big fall increases. Don’t forget the lesson for those 1980 investors.
  • What’s your exit strategy? If you’re a buyer of gold, what’s your long-term plan? Will you hold no matter what or do you plan to sell at some point? Remember that gold doesn’t throw of cash as would bonds (interest) or some stocks (dividends). How will you eventually convert it to something you can use to pay for retirement expenses?
  • How much should I own? I’ve heard of some people having invested all of their savings in gold. This, by any professional advisors perspective, would be highly speculative. My own perspective would be if you want to own gold, limit holdings to approximately 5% of your portfolio. I’ve heard of other professionals recommending up to 20% (Jim Cramer).
  • How will I own gold? If you decide to buy gold, you have several choices. A few of the most common include gold coins, stock in gold mining companies, Exchange Traded Funds or gold bullion. Each strategy has its own set of pros and cons. Gold coins are pretty easy to buy and store but the mark-up/mark-down can easily be 5% or more, meaning if you bought coins today and sold them tomorrow, commissions could total 10% or more. With gold mining companies, you’re going directly to the source but there’s typically an element of speculation similar to investing in an oil drilling operation in a known oil field. You also have management expertise as an element of risk. The most popular Exchange Traded Fund (ETF) is offered under the symbol GLD. What you are buying here is your pro-rata share of gold bullion. If you choose to purchase bullion directly, shipping, insurance and storage fees can be very costly. In thah case, choose moving companies denver who can ensure that your moving experience will be worry-free and that all of the hard work of moving will be covered.
As with any investment, you want to make certain that your strategy is based on thoughtful consideration of your particular facts and fits into an overall plan that accounts for multiple possible outcomes. This is where the advice of a professional can be invaluable.