The Gold Bug: Catch it at Your Own Risk

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Gold has climbed to record highs recently, topping $1,050 an ounce, and its admirers say it will keep on going, thanks to jitters about the world economy, the falling dollar and growing demand from commercial users.

Gold has been the financial fallback throughout history. So, is it a good alternative today to your certificates of deposit, money market accounts or other “safe” holdings?

Not if safety is your chief concern, though some gold holdings could help diversify a portfolio.

It’s much easier to speculate on gold than it used to be. No longer do you have to hoard jewelry or buy coins off a late-night infomercial. One of the easiest methods is an exchange-traded fund called SPDR Gold Shares (Stock Quote: GLD). Each share represents one-tenth of an ounce of gold, so the share price moves in tandem with the gold price. The fund has returned about 36% during the past 12 months, compared to 15.6% for the SPDRS ETF (Stock Quote: SPY), which tracks the Standard & Poor’s 500.

Many investors opt for funds specializing in mining-company stocks. Evergreen Precious Metals Fund (Stock Quote: ECWBX), is up up 115% during the past 12 months, for instance. The 73 gold-oriented mutual funds tracked by Lipper, the market-data firm, returned nearly 108% in the 52 weeks ended Oct. 15, beating all other fund categories.

Of course, the immediate question for would-be gold investors is: Is it too late? It’s always risky to jump on a bandwagon that’s been rolling for some time. If investor enthusiasm wanes, gold prices could drop.

Investors should also be aware that gold has not been a stellar performer over time. In his bestselling book Stocks for the Long Run, Wharton School finance professor Jeremy J. Siegel says that from 1946 through 2006 gold produced a “real” return of just 0.5% a year above the inflation rate, compared to 6.9% for the Standard & Poor’s 500.

Gold-investing advocates point to numerous factors that could keep driving the price up, such as shrinking availability of gold ore, greater demand from investors who want to diversify their holdings and growing demand for gold jewelry in Asia.

On the other hand, improvements in the world economy could reduce demand for gold as a safe haven.

Many financial advisers say individual investors are wise to have some holdings in commodities such as oil, grain and precious metals, perhaps 10% of one’s investment portfolio. But gold would make up just a portion of the commodity allocation.

And, given its sharp swings in price, gold probably should not be viewed as a “safe” investment, despite its historical role as a safe haven in troubled times. Gold is a speculative holding, best reserved for money you can afford to lose.

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