How To Play $1K: Go For The Gold

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Editor's note: Not drowning in debt? Have $1,000 to put to work? TheStreet.com senior correspondent and You're So Money author Farnoosh Torabi follows up her takes on certificates of deposit, peer-to-peer loans and Whole Foods stock, with a look at pure gold.

Growing up, I've always preferred silver to gold. My mother assured me that would change one day, as I would grow up to appreciate "the finer things in life." She'd be happy to know that now -- at the ripe age of 28 -- I am discovering that gold does, indeed, have "fine" incentives -- not just in the way of shiny hoop earrings, but as an investment for a diversified portfolio.

This week, let's "play $1K" with one very fine Gold American Eagle Coin (currently around $998).

The Golden Rule

Gold's pretty hot right now, as the commodity is considered a "safe haven" during a weak market.

We hear that rationalization all the time. But why?

For one, gold is viewed as a means to store value when all other financial instruments -- like stocks, funds, the U.S. dollar, etc. -- are losing value. Therefore, it's no coincidence that the price of gold tends to increase amid rising inflation, a weak dollar and higher oil prices.

What's more, gold insiders tell me, the precious metal has something going for it that other financial instruments don't: it's not based on a government's or financial institution's promise -- it's not backed by debt. Instead, gold is tangible. You can hold it in your hands and it won't degrade. That -- considering nothing's ever really "guaranteed" by government or the corporate world over the span of history -- is pretty attractive.

Finally, the price of gold can easily run up (or down), considering its small market supply, relative to other investment categories.

One Ounce, Please

Earlier this year, gold struck a high of $1,030 per ounce. It has since scaled back a bit to around $915 per ounce (recently), but the price is currently rallying and many experts are forecasting another solid incline in the next six months of up to 20%, due primarily to supply and demand.

"We're predicting gold at $1,150 per ounce by the end of the year," says David Beahm, Vice President of and Director of Marketing and Economic Research for Blanchard and Company, a leading gold retailer. The Gold American Eagle Coin, specifically, is the most widely traded gold bullion coin, says Beahm. Year-to-date, Blanchard has sold just as many gold coins as it did in all of 2007. The Gold American Eagle Coin is also guaranteed by the U.S. government by weight, content and purity. There is a bit of a mark-up from the "spot price" of gold, mainly so the dealer can cover its costs.

How to Trade Your Gold

As a general rule of thumb, investors ought to keep their exposure to gold limited -- around five percent of a diversified portfolio -- since the price can be highly volatile, just as the market conditions which drive the price of oil can be uncertain.

Don't have a thousand dollars for a gold coin? No worries. Investors can buy the Gold American Eagle Coin in a fraction as small as one tenth (1/10) of an ounce, which would cost around $100.

As for how long one should hold onto the commodity, Beahm suggests the "long term" or at least, more than one year. To sell a gold coin, investors can choose to work with a variety of retailers like Kitco (kitco.com), Blanchard (blanchardgold.com) and USAGOLD (usagold.com).

Experts don't usually recommend selling back your entire gold investments unless you really have to -- sort of like life insurance. It may be wiser to rebalance your gold exposure, by selling a bit here and there when the market goes awry.

Constable on Gold

My colleague here at TheStreet.com, Simon Constable, is our resident gold expert. He, too, is bullish on my investment.

Gold Could Hit $1,300 (Video)

Simon Constable explains that favorable chart formations combined with an increasingly unappealing stock market could take gold prices back to record highs and beyond.

To watch the video, click the player:

According to Simon, "Buying gold bullion coins is like buying financial insurance for your portfolio. It's a hedge against catastrophic events occurring." What if conditions suddenly improve? "If nothing bad happens, then the gold will be a bad investment, but everything else will be superb," he says. "But if something bad happens, like a depression or financial catastrophe, then the gold should greatly appreciate in value."

I can live with that.

What Do You Think?

 

Had I stated I was interested in purchasing gold a few years ago, I would have expected quite a few brush-offs. Only weird folks like gold, right? It's so Byzantine!

 

But now gold, as an investment vehicle, has become more socially acceptable. What do you think? Am I still to be considered "weird" for buying into the new gold rush?

 

A gold-focused exchange-traded fund is the SPDR Gold Trust (or SPDR Gold Shares)(GLD) EXCHANGE="NYSE" PRIMARY="NO"/>. To learn more about gold, check out these videos on TheStreet.com TV: Decoding Bar Bullion (featuring a 400-ounce gold bar) and Gold Parties Are 'So Money'.

Catch more of Farnoosh’s advice on Real Simple. Real Life. on TLC, Friday nights at 8 p.m.

 

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