As an investment, gold doesn’t always glitter

A promise you can trust is as good as gold. The highest level of performance is known as the gold standard. If you’re married for 50 years, you celebrate your golden anniversary. Clearly, gold carries connotations of wealth, value, and beauty. But as an investment, is gold always a dazzling success story?

Many people apparently think so. If you were to look at the first decade of this century, you’d have said these investors had the numbers on their side, because gold prices shot up from around $280 per ounce in 2000 to $1,888 an ounce in August 2011. And for the most part, this same decade was not a good one for the stock market, so it’s not hard to see why a generation of investors might think that gold is perpetually a good alternative to equities.

Of course, the contrasting movements of gold and equity prices during that decade are not unrelated. When the stock market is volatile, investors often flee to gold as a “safe harbor,” and the increased demand drives gold prices up. So it perhaps shouldn’t be that surprising that the stock market rally we’ve experienced the past few years has lessened the hunger for gold. And yet a lot of investors are surprised – and even stunned – that gold prices have now fallen about 20% from their record high in August 2011. After all, even with stocks performing strongly, isn’t gold still a good investment just because it is … gold?

There’s no simple answer to this question. On the one hand, gold is a finite and relatively rare commodity, so it will likely always maintain considerable value. However, as recent history has shown, that value will not always increase. Like any investment, gold will rise and fall over time – and sometimes, those drops, like the gains, can be pretty big.

Also like any other investment, gold carries its own set of special risks, which will vary, depending on the specific investment vehicle.

For example, if you buy a gold futures contract (an obligation to buy gold at a predetermined future date and price), you could lose money if gold falls because you’ll still be obligated to complete your contract at the higher, agreed-upon price. If you purchase physical gold in the form of coins, bullion, or bars, you’ll face storage, security, insurance, and liquidity issues. As an alternative, you could buy shares of stock in gold mining companies, but you need to do a lot of research beforehand, because some of these companies may still be in the gold-exploring stage – and there’s no guarantee that their explorations will lead to profitable discoveries.

Also, even when its price is considerably lower than it is today, gold is still a fairly expensive investment compared to other choices.

 

Still, despite these considerations, you may find that gold can be a useful part of your portfolio. If you don’t want to own physical gold or invest in futures contracts, you could purchase shares of a “precious metals” mutual fund.

However you choose to own gold, keep in mind that this type of investment should probably only make up a small percentage of your portfolio, with the exact amount depending on your goals, risk tolerance, and time horizon. Instead of counting on gold as a sure ticket to investment success, seek to maintain a diversified portfolio containing high-quality stocks, bonds, government securities, and other vehicles.

Gold prices may have fallen sharply, but they can certainly turn around at some point. If and when that happens, try to maintain the proper perspective – namely, be aware that when purchased in a suitable vehicle and in appropriate proportions, gold can possibly benefit your portfolio, but it is not a “golden ticket” to never-ending gains.

This article was provided by Lauri Binius Droster, CFP, a financial adviser and senior vice president at RBC Wealth Management in Madison. It was prepared by or in cooperation with RBC Wealth Management. The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance. RBC Wealth Management does not provide tax or legal advice.

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