If you’ve been reading this site for long, you know I’m a proponent of all kinds of investing, from stocks to real estate. One thing I haven’t talked about for a couple of years, however, is gold. That’s something a recent reader would like me to remedy. Here’s this week’s question:
Is this a good time in our economy to buy actual gold and silver bars for an investment?
While I’ll confine my remarks to gold, the same basic rules apply to silver as well.
This has a been a good year for the Midas metal. It began the year at less than $1,100 an ounce. As I write this, it’s a bit more than $1,300. That’s a gain of about 20 percent.
Stocks, on the other hand, are basically unchanged this year. So relatively speaking, gold’s looking pretty good. Gold is also known as a “safe-haven” asset, meaning it’s a great place to be when things start unraveling, as with the recent Brexit vote.
I did a TV news story about gold back in July 2010. At the time, gold was about $1,300 an ounce. As I write this, it’s about $1,300 an ounce. So while it’s had many ups and downs during that period, it’s where it started. During the same six-year period, stocks have risen about 80 percent.
What the experts are saying now
There are generally two reasons to invest in gold. The first I mentioned above: as a safe-haven asset and hedge against uncertainty. (By “hedge,” I mean gold can go up when other types of assets, such as stocks and bonds, go down. The other reason is to offset inflation, especially the runaway kind.
Inflation is why, in late February of this year, when gold was at about $1,200 per ounce, . At the time, it looked like the Federal Reserve was going to continue to increase interest rates, which is often a harbinger of inflation.
With the problems stemming from Brexit, however, as well as a slowing world economy, interest rate hikes are less likely, at least this year.
Some very well-known investors have also come out more recently in favor of gold. In an article called “,” CNBC said:
… DoubleLine Capital CEO Jeff Gundlach likes it, and he says gold could go to $1,400. (George) Soros has reportedly been buying both gold and gold mining shares, while (Stanley) Drunkenmiller told investors last month to get out of stocks altogether and buy the yellow metal due to concerns about China’s economy and the Fed’s easy money policies.
If you’re not familiar with these names, they’re all billionaire investors with massive followings. Another respected commodities investor, Dennis Gartman, gold could hit $1,500 this year.
Of course, there are always dissenters. Goldman Sachs gold would be $1,150 per ounce a year from now. But suffice to say a reasonable number of the big boys are buyers.
Should you own gold?
I put about $9,000 of my long-term savings into gold back in 2009. It’s now worth about $12,500. I didn’t buy the actual metal, however. I bought SPDR Gold Shares, the most popular exchange traded fund (ETF) that holds gold bullion. It’s basically a stock that I can buy or sell anytime and moves with the price of gold.
As I’ve said, gold can be a decent way to hedge against inflation and global crisis. That’s why I own some and why you might consider some as well, but not more than 5 to 10 percent of your portfolio.
Why not more? Because gold isn’t a dynamic investment. Unlike companies like Apple or GE, gold doesn’t innovate, create, sell products or grow its market share. Nor does it pay interest or dividends.
If you do want to own gold, you have several choices. Three of the most popular are:
- An exchange traded fund
- Stocks of companies that mine gold
- Physical gold, either in the form of coins or gold bullion or bars
The reason I own an exchange traded fund is that it’s the most liquid (i.e., the easiest to convert into cash) and not as risky as gold mining stocks. The reason I don’t go for physical gold, which is what Cynthia is asking about, is simple: I used to own a few coins until someone broke into my house several years ago and stole them. I’m done with that form of ownership.
Some will argue that owning physical gold is the best idea, assuming you can keep it safe, because when the world completely unravels, you’ll have a physical store of value: an internationally recognized currency.
Perhaps, but if things really get that bad, I’d rather have a closet full of guns and canned food.
Beware the crazies
In summary, while gold may have a minor role to play in some portfolios, I’m not a big fan. As I’ve explained, it’s not all that great of an investment. It does, however, get more attention that I believe it deserves. More than any other investment, gold brings out the crazy in some people.
One of many examples: More than five years ago, I wrote an article called “3 Places NOT to Put Money Now.” One of the investments to avoid? You guessed it: gold. At the time, gold was about $1,400 an ounce, so my advice wasn’t off base. But here’s a reader note I received shortly thereafter:
Hi there, just want let you know you are so ignorant it’s not funny at all. You are misleading people by telling them not to buy gold. Now that I understand your IGNORANCE I am going to ask who the heck do you think you are providing such an ignorant message to the masses? Have you heard about the word inflation? It is here and we are all paying for it, at the gas pump and for our daily food. So how dare you tell people not invest in an investment that can help them preserve their savings against inflation? Who do you think you are? What are your credentials? If I had the urge and the drive I would have given your name to FCC for airing misleading propaganda. Be careful, cause I am one step from that. So retract your BS.
See what I mean? (If you’re interested, you can read my response to Bruce here.)
More than any other investment, gold seems to be the investment of the Armageddon set, encouraged by gold dealer-sponsored TV commercials and fringe websites.
Other, more logical investors, including yours truly, leave the judgment and emotion out of the equation and see gold for what it is: a non-interest-bearing, non-dividend-paying insurance policy against runaway inflation, geopolitical crisis and the erosion of the dollar.
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I founded Localpizzadeliverywalledlakemi.info in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.
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