It is hard to open a newspaper or flip to a financial channel without seeing the price of gold for the day… or an advertisement to buy gold coins. Should you buy gold now?
Why are investors buying gold?
Investors worry that the United States and other developed nations will spend years digging themselves out of debt and stocks will therefore underperform. They believe that gold will provide protection against inflation of other assets and currencies, including the U.S. dollar. Many investors view gold as having more buying power than the dollar.
Gold is also seen as a hedge against other investments. In other words, if things are going badly, the thinking goes, gold should do well. And in fact, gold has performed well in the past ten years. On average over the last decade, gold prices have increased more than 18 percent a year. By comparison, the broad stock market in those ten years has risen an average of 2.5 percent per year
How high can gold go?
While gold is now priced at more than $1,700 per ounce, since 1967 gold has averaged about $700 per ounce (price stated in 2010 dollars). As with any investment that has risen significantly higher than its historical average, investors have to have solid reasons to assume that gold is not a bubble.
In fact, in the 1980s, gold prices soared over concerns about South Africa and the Apartheid situation. And if you had bought Krugerrands in the early eighties when there was a gold frenzy and the price reached more than $800 an ounce, unless you sold quickly before the price suddenly plunged, you could have sold at a loss or held it for 20 years or more (until the last few years) to get your initial investment back.
If you decide that there are good reasons to expect that gold will go higher and that a small portion of your portfolio can be used as a hedge against inflation, political uncertainty in the Euro zone and the world, and an otherwise volatile market, then...
How do you buy gold?
You can buy physical bars and coins of gold from coin dealers or on eBay. You will, of course, pay a premium over the spot price or current price of gold to compensate the seller for his efforts. In general, coins command a larger premium because collectors value them for their artistic characteristics as well as gold content. Gold bars or bullion are a "purer" way to pay for gold without the artistic value premium. If you take possession of the gold, you have to store it in a safe place and/or insure it, which adds cost.
Perhaps the easiest way to buy gold is to buy a gold ETF. ETFs, or Exchange Traded Funds, are similar to stocks in that they can be bought and sold during the day, but they are also similar to mutual funds in that the investor is buying a piece of a basket of assets.
In the case of gold-backed ETFs, the funds own gold bullion and store it in vaults. The managers of the funds aim to reflect the price of gold, and the investor owns a fractional share of it. Fees for administering the funds, storing, and insuring the gold are deducted from the fund.
You can also buy the shares of individual mining companies or buy a mutual fund that owns stock shares in a number of different mining companies. These stocks and funds, however, do not always track the price of gold as ETFs do.
But before you do...
Before you buy gold, or any investment, a primary consideration is being able to sell it if and when you want to. Is it a liquid investment? We all know that if we sell our grandmother's gold bracelet we are going to be offered 25 cents on the dollar of its replacement value.
Right now, however, there is a thriving market for gold bars, bullion and coins thanks in large part to online markets. It goes without saying that the seller must be very careful with whom he deals. Dealing in person with a commercial, local dealer may be less troublesome than working with someone online or mailing the gold for an appraisal and offer to buy. An advantage of gold ETFs is that they are very liquid. Demand can change quickly, though, and investors must monitor political events, economic news, and investor sentiment. Gold prices are very volatile.
As investment managers, we stress diversification of investments to reduce volatility and mute temporary rough patches. If you are concerned about inflation, or the creditworthiness of various governments, you may be comfortable investing a small portion of your portfolio in gold as a hedge and as a diversification from the stock market. However, do your homework. Research ETFs and their fees. Do even more research if you are buying physical gold bullion. And unless you are planning to leave this asset to your children or grandchildren, stay informed and be ready to sell.
Tammy Kraig is a Certified Financial Planner™ licensed with a registered investment adviser that provides personal financial advice online for a fee. She specializes in working with couples to help them identify and work toward their investment and retirement goals, long-term or short.