It’s hard to ignore all the buzz about gold lately and how it’s going up to $1,000,000 or more an ounce from here. If you look back at the history of gold over the years, you’ll quickly see that gold as a long term investment has not even kept up with inflation, much less the risk-free treasury bill rate. In fact, despite all the talk about gold, I personally hesitate to call it an investment and I’ve never invested $1 in gold (other than the obligatory jewelry for my significant others over the years, but those were not investments). Gold as a commodity has few industrial uses and, for most of the developed world, provides little beyond intrinsic value. Central banks around the world hold a percentage of their currency in gold as a hedge, and you may have heard that a few countries have recently increased their holdings in light of the weakening dollar and global economic uncertainty.
The fact remains that gold investments have gone up significantly in recent months, and I’m loathe to shun an asset class that may continue to go up (though I’m not endorsing investing in gold.) Uncertainty about the value of the dollar, the global regulatory environment, a slow economic recovery, future inflation worries and the growing deficit have all contributed to the worldwide craze over gold. Near term estimates have put an ounce of gold at $1,300, with some longer term estimates up to $3,000-$5,000 an ounce. As of today, gold is at its highest levels in years, around $1,148 an ounce. I hesitate to invest in gold at its current highs, but it looks like it may be going higher. By the same token, investor appetites for gold can wane quickly, and so the price can drop quickly as well.
If you have more than $250,000 in your already well-diversified retirement account, and you have an appropriate investment choice for gold, you may consider adding a small portion to your portfolio. The investment should be in the form of a highly liquid mutual or exchange traded fund (for example, the SPDR Gold Trust or GLD which buys and houses the physical gold for all of its investors.) I view an investment in gold as more of a “hedge”, but would look to liquidate it once the prices started dropping. If you are serious about investing some of your money in gold, then I would wait for a short-term pullback of 3-6% in the price before buying (assuming that a pullback occurs), and would invest no more than 3-5% of your total portfolio value in gold. The investment in gold should be made in your retirement accounts due to the less favorable ordinary tax treatment gold gets as a collectible, rather than as a capital gain asset. If you invest in the GLD or other exchange traded funds, be sure to put appropriate stop loss provisions in place to protect your investment.
Another somewhat less risky way to “play” gold is to invest in the stocks or funds of gold mining companies, many of which may already be in your existing mutual and exchange traded funds. Looking up the funds you own on http://morningstar.com will reveal many of your mutual funds’ holdings.
For the first time in my life, I am personally considering an investment in the GLD fund, but I have not done so yet. So far, none of my clients’ assets are invested in gold directly either. I should emphasize that I consider a bet on gold to be a speculation, so it should only represent a small portion of your portfolio, and only if you have a large enough portfolio. While you could buy gold coins or any number of gold trinkets hawked on late night TV, I recommend that you weigh your decision carefully and consider other investment options if you have a small portfolio. Well diversified growth mutual funds are always a good bet.
Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner ( CFP ), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group. Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society. Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning. He specializes in entrepreneurs, professionals, company executives and their families.