Is Investing in Gold a Good Idea?

The price of gold hit $1,100 an ounce today on signs of a weakening dollar. With the stock market as volatile as ever with the coming end of a bullish market, many investors are thinking about buying gold. Gold has always outperformed other commodities during times of economic uncertainty and this “super-recession” is no different.

Here are some things to consider in order to understand if buying gold is the best idea for you:

1) Know the type of gold you are buying:
1. Direct ownership- The value of gold fits the pure economic model of supply and demand and can not be altered by government intervention.
2. Gold exchange – traded funds- The recent explosion in exchange traded funds (ETFs) presents an even more interesting way to invest in gold. An ETF is a type of mutual fund that trades on a stock exchange like an ordinary stock. The ETF’s exact portfolio is fixed in advance and does not change. Thus, the two gold ETFs that trade in the United States both hold gold bullion as their one and only asset. You can locate these two ETFs under the symbol “GLD” (for the streetTRACKS Gold Trust) and “IAU” (for the iShares COMEX Gold Trust). Either ETF offers a practical way to hold gold in an investment portfolio.
3. Mutual Funds – Investing in a gold mining company.
4. Junior gold stocks.- a more speculative and less physical method of owning gold.
5. Gold options and features- An experienced investor should invest in options and features that will allow them to predict the price of gold in the future.

2) How can I invest in gold? Where do I buy it?

You can purchase gold bullions from a dealer or your bank.

3) Why can investing in gold be a bad idea?

Gold is too exposed in the market right now and has become front page news. Every time I flip on CNBC or click to mainstream financial website, I have a better than average chance of being reminded gold is once again at all time highs. Anytime an investment – gold, housing, oil, or even tulips – has become front page news, the end is likely drawing nigh and the smart money is slowly exiting the playing field. Remember, the smart money sells when the news is at its best. Also, gold produces no tangible income and is rather useless for chemicals and industry and is largely needed for its physical appearance.

Is now the right time?

In my opinion, you should not invest more than 5% of your portfolio into gold because its price in the future is merely speculative. It has broken too many records and can come crashing down when investors realize it is not worth as much. Is it a bubble? No, because the price is largely tied to the drop in value of the American Dollar and fear of the stock market, rather than investor splurging.

If you’d like to pick up a few gold coins, or bullion, as a percentage of a broader long-term investment portfolio, that seems reasonable. If you dump your entire nest egg in gold, betting on the continuation of tough times, well, that just sounds too risky for my liking.