Betting on Gold: Is This the Right Time?

NEW YORK (MainStreet) — Your bank savings are paying next to nothing, so maybe it’s time to look at an age-old alternative: gold.

Gold has historically been the refuge in times of crisis, and the rippling effects of the earthquake and tsunami in Japan certainly count as a crisis that may damage the world economy and financial markets in ways we can’t foresee.

While gold has not always proven to be a good long-term holding, many investors like the fact that gold marches to a different drummer. When stocks and bonds are suffering, gold may flourish, and vice versa. Thus it can stabilize a portfolio, much like cash.

But as an alternative to a plain old bank account, gold has some drawbacks. For one thing, it earns no interest. That may not seem like a big deal today, because interest rates are so low, but rates could rise in the next year or two. If you bought gold now and its price dipped, you might have to sell at a loss to move to savings and checking when bank accounts became more generous.

Of course, you also might have storage costs with gold, though it wouldn’t take a big safe deposit box to hold a few pounds worth tens of thousands of dollars.

Gold has had a terrific run, rising from a mere $300 an ounce a decade ago to more than $1,400 today and beating stocks by an extraordinary margin. But gold peaked at about $850 an ounce in 1980, pulled back for years and didn’t return to that high until 2007. On an inflation-adjusted basis, gold would have to rise to $2,200 to match the 1980 high. So during this 30-year period, stocks have done far better.

Gold has not proven to be a good long-term holding, trailing stocks and bonds by large margins in the 20th century. It serves best as a short-term hedge against inflation and crisis. If that appeals to you, there are several ways to place your bet.

Stocks in gold mining companies or mutual funds that hold those stocks are easy to buy from your broker or fund company, and you may even earn some dividends. Note that gold stocks are not a perfect play on gold prices, as other factors come into play. Gold may rise but an individual gold mining firm may fall if its mines are playing out, for instance.

It’s easy to buy gold in the form of jewelry and coins. Depending on its artistic value, jewelry may sell for more than the value of the gold it contains, so a bet on jewelry requires an understanding of this component of value. Similarly, coins may have added value as collectibles, requiring knowledge beyond the forces that drive raw gold prices.

The easiest way to invest in pure gold is through an exchange-traded fund like the SPDR Gold Shares (Stock Quote: GLD). The firm that backs these shares has about $50 billion in gold stored in vaults.

Because exchange-traded funds, or ETFs, trade like stocks, you could buy or sell on very short notice. You’d have no storage costs or worry about your gold’s purity.

You would, however, have some expenses, namely trading commissions when you buy and sell, plus an annual expense ratio of 0.4% of your holdings.

Because gold’s price is volatile and has suffered some severe long-term slumps, most experts say amateurs should keep their gold hoards small – probably well under 10% of your investment portfolio. Gold has certainly been a winner over the past decade, but that presents another issue: As a rule, it’s risky to buy any investment after it has had a good run, as the big gains may be over.

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