I’m sure you’ve heard the people on your favorite business TV or radio station talk about gold. It is kind of exciting, I mean after all, its gold! The real question is, should gold be a part of your portfolio? We’ll go into some brief background on why people invest in gold and then give our opinion on whether it deserves a place in your portfolio.
First of all, gold is a precious metal. There is a limited supply, especially in the short term. That means that gold prices are mainly driven by demand. Demand changes dramatically for many reasons, but the main reason that people buy gold is usually out of fear and greed. The fear comes when the stock market crashes and the volatility increases. People see gold as a safe bet and move money from stocks to gold. This causes the price of gold to shoot up.
As the price of gold rises, the greed kicks in. Investors see the price rising and greed compels them to buy it so they can participate in the rise. Also, when gold rises, you’ll find thousands of commercials and crooked investors telling you to buy more. This all leads to a further rise in gold prices.
There are other reasons people invest in gold. Some invest for a hedge against inflation. Some buy gold because they understand it (its easier to understand than a stock). Many buy gold simply because they are comfortable with it. And then, of course, there are the speculators – buying gold and hoping for big returns.
For some reason, gold makes people feel safe. But the safety of gold is a myth. If you examine historical gold prices it’s true that they do trend upward in the long run. However, gold prices have as many bubbles as the stock market. For example, in 1980, shortly after the Soviet Union invaded Afghanistan, gold prices shot up from $400 per ounce to over $800 in just a few months. Within six months the prices were back near $400.
So, given today’s gold prices and econominc environment, should you buy gold? In my opinion, gold can be used as a small part of a portfolio, as it protects against inflation and does rise over time. However, over the long run, you will earn more investing in stocks. Investing in gold seems more like speculation and sitting on the sidelines to me. Indeed, if gold is such a great investment, then why are there thousands of commercials and emails telling me to buy? Apple stock has been a great investment, but I don’t see commercials telling me to buy their stock!