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Is Gold a Safe Investment?

By on September 22, 2011 in Money

Is Gold a Safe Investment?Since the beginning of the financial crisis many pundits have pointed to putting money into gold investments as being an extraordinarily safe strategy for protecting your portfolio. Is that accurate?

Why Do Pundits Point to Gold?

When recessions hit or there is a lot of volatility in the stock market, the pundits point to gold as being a safe investment. This harkens back to the days that America ran on the gold standard. Many believe that if the American (or global) economy collapses, paper money will be useless and physical assets like gold will be more valuable because gold has a value just for being gold.

A second reason gold is touted as a great investment is it is seen as a hedge against inflation. While it is true that historically gold has been able to maintain it’s value in the face of inflation, it hasn’t done much else. Gold has historically returned about 1% per year (the same as real estate).

A third reason gold is touted as a place to put your money is there is money to be made is marketing gold. Jewelery stores, pawn shops, and online companies ramp up their marketing efforts to get you to sell your gold to them. This continues to drive the price up, but eventually the bubble has to burst.

Reasons to Avoid Investing in Gold

The main reason to avoid investing in gold right now is the price has skyrocketed over the last 5 years. The price has jumped from around $600 per ounce to over $1,800 per ounce. That’s a return of over 300% in 5 years. If I told you there was a great stock that had jumped 300% in 5 years, you might not be as eager to jump on board. With the price being this high some believe you can still hop on and ride the rocket a bit longer – but you risk buying high (and eventually selling lower). Also, you would then be investing in gold just because it was going up – not looking at it as a safe investment. If gold has historically returned 1% and has just experienced a 300% run up, simply do the math and expect low returns in the future.

A secondary reason to avoid investing in gold as a safe investment is that in a worldwide crisis, gold will not be as useful as you think. Would you rather be surrounded by glittering gold or by canned foods, fuel sources, and weapons to defend your household? Additionally, when most people think of investing in gold they are doing it in the stock market through ETFs or mutual funds. In a worldwide collapse, you won’t have physical gold sitting in your house for you to trade for goods and services.

Alternatives to Gold Investing

Instead of flocking to a product that you see advertisements all over for (“We’ll buy your gold!”) you have better options for your portfolio.

To protect against volatility

If market volatility has you spooked, you have a few options to fight back. The first is a diversified portfolio. If you have an appropriate balance of stocks and bonds, volatility won’t impact you as much. The second is a long term view. If you are just starting out in your investing, volatility should be meaningless because you have decades for your portfolio to recover.

To protect against inflation

Inflation is a serious risk that you need to account for in your portfolio. Instead of jumping on the gold bandwagon (where the price can fluctuate greatly) you would be better served by other investment products. These include TIPS (Treasury Inflation-Protected Securities) whose value goes up with inflation and bond mutual funds (since bonds do not fluctuate as much as stocks but return a higher amount than money market accounts).

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