Investing In Gold – Is The Price Right?

Rachel writes in with the following question about investing in gold:

I enjoy reading your blog about wise spending. I have a question and I’m not sure who to go to. My husband is interested in investing in gold. What are your thoughts on investing in this direction? Do you have other sources that you lean on for investing advice?

Gold Coins

Photo by Muffet

Rachel, your question comes at a good time. I spend a lot of my day listening to a variety of talk radio programs at work on subjects that range from sports to politics to personal finance. All three tend to run a lot of advertisements for investing in gold. While intrigued, I confess to not knowing much about investing in commodities, so to answer your question I decided to dig into some research while asking the Frugal Dad community for help with your question.

Why Invest in Gold?

A recent check of gold prices shows it is hovering around $1,000 an ounce. It seems like every week or so gold prices set another record. But in the world of economics, it is usually true that what goes up, must come down. That’s not always the case, but I wonder if gold prices will work the same way.

As the market moves ever-so-slowly towards recovery, will gold prices remain high? Who knows? Conventional investing wisdom says gold is a safe bet when times are tough (inflation, weakening dollar, etc.). We’ve certainly had tough times, but to this point it seems inflation has been kept in check. I’m not completely sold on the idea our government will be able to control devaluation of the dollar as more and more money is pumped into the system.

So the real question is, “Is now the right time to invest in gold, or would investors be getting in at the top only to see their investments disappear in a recovery?” I think the answer to this question is the same answer I give to others interested in any form of investing:  Invest for the long term, don’t try to time the market, and diversify.

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.

Ask the Readers: OK readers, I know there are plenty of you out there smarter than me on the subject of investing in gold. What more can you tell Rachel about gold investments? Is it better to invest in physical gold, mutual funds, etc? What are your thoughts on the timing of making new purchases of gold? Feel free to make any specific brokerage recommendations you may be familiar with as well.

Comments

  1. Gold of course has appeal as an investment, as do most other investment classes. If you understand gold, it may be a good choice, both now and at many other times. The problem is — only a small percentage of those reading these words understand gold. I do not intend those words as an insult but as a fair statement of the reality that applies (in my assessment, to be sure).

    I can demonstrate the problem by pointing to six words that appear in the article by Frugal Dad. Frugal Dad is plenty smart and obviously well-intentioned. But the six words offer exceedingly dangerous advice. The fact that he puts these six words forward shows that he doesn’t yet get it (please understand that I intend no personal offense, Frugal Dad). If Frugal Dad doesn’t get it, I think it is fair to say that most of those reading Frugal Dad’s words do not get it.

    The six words are: “don’t try to time the market.” To say those six words is the equivalent of saying “don’t look at the price of the investment class you are buying.” It is obviously impossible to make a good buying decision without looking at price. So those six words rule out the possibility of making good buying decisions.

    We are at a primitive level of understanding how investing works. I don’t mean just Frugal Dad and his readers. I mean all of us. When we get to a point where we have developed the humility to say the three magic words “I” and “Was” and “Wrong,” there are all sorts of wonderful things that we will be able to learn about gold and all the other asset classes. We cannot learn any of those things until we develop the ability to talk intelligently about price.

    And we cannot talk intelligently about price until we come to understand that there is no magic world in which timing doesn’t work. In the real world, paying attention to pricing questions ALWAYS works. Any investing analysis that begins with the idea that paying attention to price is a bad idea cannot end in a good place, in my opinion.

    Rob

  2. I don’t like gold for several reasons: volatility, you can’t eat it, you can’t wear it (not as clothing in any practical sense), you can’t live in it, and it’s tied (as Frugal Dad mentions) to a lot of government market manipulation. Granted, individual stocks do the same and share many of these characteristics, which is why you should heed the advice not to throw all your savings and investments into gold. A small portion (probably no more than 5%) would be the max I’d be comfortable with.
    Gold coins/bullion also present these problems: storage (how will you keep it safe), authentication (ever heard of Fools Gold also known as pyrite?), and higher fees to exchange into cash than most stocks/mutual funds. To put it another way: let’s say you dump $10K into gold. Who will you buy from? The Pawn shop down the street? How will you verify it is real gold? Once you have it, how will you store it (safe deposit box = extra cost to the investment, under the mattress as a target for thieves)? Once you’re ready to sell to reap your rewards or cut you losses, how long will it take you to find a buyer who will give you fair value?
    A lot of questions, and for a seasoned investor these might not be too much. However, it might make sense to own a precious metals fund. Check with your investment company and see if they offer something like mine does: a “gold” fund that actually invests in a lot of precious minerals: copper, gold, silver, platinum, etc. These are easy to purchase just like any other fund, easy to store, easy to insure certificates, and easy to convert back to cash when needed. For a smaller investor, there’s the added advantage of being able to invest small amounts ($500) vs. the $1000 or so you’d have to put up to buy a single ounce bar of gold.
    Add up the costs vs. reward potential and see if it’s worth it. For me: no way!

  3. I’d like a gold a lot better at $700 or $800 an ounce. Don’t think $1050 is a terrible price and there is still some upside potential. The longer we have easy money and immense federal deficits in the US the higher gold is going. If the politicians start attacking the deficit and interest rates head up to protect the dollar, the price of gold will take a breather and probably head downward…. odds of that happening in the current environment is low. At some point in the next two years the Fed will raise rates, but I don’t see the deficits being closed or the fall of the dollar against other currencies changing much, so I still think gold has room to head higher. But I would caution investors to limit gold to no more than 5 – 10% of the portfolio, and in addition to bullion other investment vehicles are ETFs like GLD or gold stocks.

  4. I find this post quite interesting and topical because over here in the UK, there has been an explosion of pawnbrokers specialising in gold and you can’t turn on the TV without seeing a commercial for yet another gold pawnbroking company. I know this is only small time gold asa opposed to the gold money markets but some of these firms have seen a 600% increase this year!

  5. So long as we believe our money still has an intrinsic value then people will continue to work, play, eat etc with it. only if there is a massive loss of confidence in paper money will gold come to the forefront. It could form part of your portfolio but not at today’s prices for the last few weeks have been about selling gold. I’ve watched the price over the last 3 years and Gold doesn’t like going over $1,000/oz this is most likely psychological as other markets rally around round figures too. I’ve heard that silver is more ethical as it’s less prone to market manipulation. China has gone on tape saying it is diversifying out of the dollar but doing it slowly enough so that the market doesn’t notice, very fishy!

    don’t believe any one person and their investment suggestions. I’d hate for you to loose money based on some random internet comment. only risk what you can afford to loose.

  6. I tend to try to follow Warren Buffet’s advice. Put your money where everyone is panicking. Gold has already made a pretty good run, and it is not likely that it will continue, at least not far enough to make it worthwhile. Fluctuations of $10, $20, or $50 isn’t a huge percentage at $1000 an ounce. Real estate, or real estate mutual funds, on the other hand, have been taking a pounding, and are much more likely to be undervalued, in comparison to gold. If the economy totally collapses it won’t really matter where your money is. The government can, like it did under FDR, force you to turn in your gold in exchange for worthless dollars.

  7. I think you could probably find as many opinions on gold and silver as Carter has pills, but there is a long history of mankind’s use of gold and silver and many will say that as a medium of exchange they are relics of the past. Perhaps, but there must have been a reason why they were used for a monetary value and why the founding fathers of the U.S. constitution put the laws in there that they did.
    They did it because every fiat paper currency that was not backed by gold or silver had become worthless, without exception.
    Some will say that our dollars won’t become worthless, there is a huge amount of wealth in the country to back our paper. There is, but now there is a huge amount of debt to go with it, close to a million for every household in the U.S. and rising.
    Maybe the dollar will be allright someday, but in these times I’m going to make sure I have some physical gold and/or silver in my safety deposit box as insurance.

  8. When I was reading about the prospects for gold late 2008/ early 2009 the predictions were for $1200 an ounce in Q1 2009. It clearly has taken quite a lot longer than that to get a reasonably stable $1000 so I believe there is still some profit potential but it might dip again before going up further (I saw a recent article predicting a double dip in prices) so it may be worth waiting just a month or two. Agree with the previous post about investing for the long term in gold.
    Personally I use http://www.bullionvault.com, very secure and easy to use. Have been investing a fixed amount each month so averaging the rate over time. But only part of my portfolio, diversification is important.

  9. I think you could probably find as many opinions on gold and silver as Carter has pills, but there is a long history of mankind’s use of gold and silver and many will say that as a medium of exchange they are relics of the past. Perhaps, but there must have been a reason why they were used for a monetary value and why the founding fathers of the U.S. constitution put the laws in there that they did.
    They did it because every fiat paper currency that was not backed by gold or silver had become worthless, without exception.
    Some will say that our dollars won’t become worthless, there is a huge amount of wealth in the country to back our paper. There is, but now there is a huge amount of debt to go with it, close to a million for every household in the U.S. and rising.
    Maybe the dollar will be allright someday, but in these times I’m going to make sure I have some physical gold and/or silver in my safety deposit box as insurance.
    Forgot to write good post! Looking forward to reading your next one!

  10. Gold is a risky investment, but all investments are risky.

    It certainly has place in a portfolio or at least some ETF’s that follow precious metal prices.

    However I doubt if this is the time to buy. I would wait for it to cool off then enter at a lower price point

  11. Just wondering if the dollar collapses and the ecomomy tanks, what you will spend your gold on? I personally will be stocking up on gasoline and bottled water. In a failed economy, bartering will be the means of exchange. When I need to eat, gold just becomes a shiny rock.

    Also, gold’s 25 year annual return is less than the S & P 500 and the annual inflation rate. Gold is a panic commodity. As the economy recovers, gold prices will come down.

    You know what you call an investor who tries to time the market? Broke.

  12. I always like the comment about gold that “you can’t eat it.” Well, you can’t eat paper dollars either.

    The truth of the matter is that gold counteracts the fall of the U.S. dollar and since the year 2000 and the addition of more competition to the U.S. dollar like the EURO, the dynamic has changed for gold. Prior to that time there was no real competition to the U.S. dollar. Now we have the EURO and in 2004 the introduction of the first gold ETF in America and other ETFs that offer alternative currencies and liquid instruments for investors.

    The dollar index is what one needs to watch. It’s presently in a downward trend and gold naturally is in an uptrend. Gold has broken out to a new high but the Dollar Index has not broken to a new low (below the March 2008 72 area. Until that 72 on the index is broken, I’d be cautious about gold short term.

    That said, a holder of physical gold cares not that it falls to $700 an ounce on its way to $2,000 an ounce or higher once that dollar index does break down…and it will.

    I’ve written quite a few articles on gold, challenging financial advisors on their understanding of how it fits into a diversified portfolio. You can find the various articles under my “gold” category here: http://fedupbook.com/blog/category/gold/

    Disclosure: I don’t sell gold. I write about it. I’ve written a book on it with the intention of helping people understand it better. I was a financial advisor for over 20 years and left to tackle more pressing issues in America that need addressing.

  13. Doug,
    My comment was addressed to those who believe that someday they will be able to take their gold to the grocery store to by food when paper money goes away. I honestly couldn’t tell you if gold is a good idea in a diversified investment portfolio.

    I happen to believe that the dollar will recover as the it always has. I don’t believe we will see the US default and hyperinflation and all that crazy stuff.
    Mike

  14. Hi Mike…appreciate your response. I did write an article about how gold would be used “if” there were any hyperinflation.

    In a nutshell, it was exchanged for scrip in Argentina which would in turn be used for purchases that day at the local swap meet type places that popped up.

    As far as the dollar goes, it only has 38 short years of existence without gold backing. That’s not really a long track record to bank on (pun intended).

    Of course anything can happen. But the track record of our government (including Republicans TARP program etc.) doing the right thing and this current administration adding health care, cash for clunkers, $8k housing handouts, environmental polices, cap and trade, more bailouts (there talking of a 3rd) added to Social Security and Medicare shortfalls as well as a growing Welfare state and state bailouts, I don’t see any real long term solutions to improve GDP.

    Adding spending to spending results in more debt. That’s why the dollar is in peril despite any potential short term bounces.

    It’s the long term I’m worried about because “of” governments doing what they do best. Who is stopping them?

    What a wicked game we play….

    You may call it “crazy” but hey…I still believe that someday my Cubs will win the World Series! Faith only takes one so far. It is this “faith” that the dollar is based on without any connection to gold. In 38 years since Nixon took us off the gold (backed by) standard, the dollar hasn’t fared too well and since 2000 I’m afraid the game has changed for good. Until the government is curtailed or held accountable, the game will continue to be wicked.

    At least the Cubs got new ownership! My faith has increased!

  15. the book “the intelligent investor” talks a little about gold investments but it shows that they are good if you have some money to spare in them because investing in gold bullion like coins brings with it other expenses like insurance and storage fees that eat up some returns obtained. But personally i think that one should invest in them primarily because of the fact that they do not loose much of their initial value

  16. Warren Buffett is a strictly a long-term investor with a holding period of “forever”. The fact that he is an investor prevents him from investing in gold. Gold will never earn any money, nor will it ever pay out dividends to its holders.

    The only thing gold can do is precisely why I have been buying; it works extremely well as a store of value. An average automobile in 1950 would have cost the equivalent of approximately 30-40 ounces of gold. The same holds true today at the recent spot gold prices above $1000. Had you instead decided to hold cash, you would not even have enough money to pay for the down payment.

    The most common reason cited by people bullish on gold is inflation and although it is certainly a contributing factor, I do not feel that this is the most important issue affecting gold prices. Instead, I believe that there are three other overarching trends taking place right now that are exerting much more upward pressure on the price of gold.

    You can read more at http://lucidinvesting.wordpress.com/2009/10/20/why-warren-buffett-doesnt-like-gold-and-why-i-do/

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