The latest Gold Rush made history yesterday when the SPDR Gold Shares ETF, Ticker GLD, passed the SPDR S&P 500 ETF in value. Both funds are managed by State Street Corp. As fearful investors sell stocks and invest heavily in the precious metal, GLD climbed to a total value of $77.5 billion to the SPY at $76.7 billion. The Wall Street Journal provided an excellent article yesterday “Gold Reigns even on the Stock Market”.
What do you own when you buy gold?
What you get depends on how you buy gold. You can purchase directly in physical gold (coins, ingots, etc.) or indirectly by buying gold through an exchange traded fund like GLD. You can also participate in gold by buying companies that mine or produce gold. Gold is a commodity, like coffee, orange juice, oil, lumber, pork bellies, etc. You can see, touch, feel, and hold gold, but gold pays no dividends. It is simply a precious metal and the price is set by the markets. As more people buy gold the price rises and when more sell it falls. Gold is considered by many as a short-term hedge against inflation (rising prices). There is a limited supply of gold which is why the price has risen so dramatically during a gold rush.
What do you own when you buy common stocks?
Common stock represents ownership in companies. When you buy an individual stock, like ExxonMobil for instance, you become one of many owners of ExxonMobil. ExxonMobil is a huge company so your ownership interest is extremely small, but you are still an owner even if you buy it within a fund. You receive dividends paid to owners and participate in the growth or losses of the company from it’s business operations. Like gold and other investments, the price is not only based on the company’s performance but also on the demand for the company as investors buy and sell the company’s shares. Unlike gold, the companies represented by your investment in common stocks provides jobs and the capital needed for the company to produce it’s products or services.
Should you buy gold?
Gold is historically used by investors to protect their portfolio in difficult economic times. For most of us, there is no investment portfolio, of any size, to protect. Our goal is to invest for the future and pay off debt and gold is not a long-term investment. As the Wall Street Journal pointed out in yesterday’s edition, the long-term, after adjusting for inflation, investment return on gold remains near 0%. Yes, that means no return or nothing over the long-term. Given the dramatic rise in gold prices over the past few years, there is substantial risk in buying gold. Historically, once the price of gold begins to fall, more investors sell causing the price to fall rapidly.
My advice is to resist the temptation to join the gold rush. Focus on paying down debt and investing for your future using mutual or exchange traded funds. If you just can’t resist, limit your investment in gold to 5% or less of your portfolio.
I think it’s crazy that people are pushing gold especially since prices are so freaking high right now. Gold is too volatile for me. If I was going to buy gold I would only do so if prices were at record lows. Even then I would be playing the timing game because I would want to sell it after the prices rose, but before they dropped. That’s the trouble with such a volatile investment. I think 5% is a safe percentage of such an investment if someone comes down with GOLD FEVER. 😀
Thanks Brad! Well said!
My mother has liquidated all of her investments and has bought silver and gold. She has lost confidence in the US Treasury. She even takes money out of the bank. She doesn’t believe in cash anymore. I sometimes think she is going overboard but my mother is a very strategic financial planner. She has no debt not even a mortgage. So I think about financial plan and I have a lot to ponder without having an anxiety attack.
Thanks Kathy!
Your mom sounds like she has shifted to tactical investing. Strategic investing is based on a plan, typically involving asset allocation, and then managing to the plan. Tactical investing is shorter term and based on the “tactic” the investor believes is “right” at that “time”. There are successful strategic and there are also successful tactical investors.
No debt is great but I would be a little concerned about how she is handling the investments. She’s won, so far, assuming she left stocks this year. Stocks actually had a whale of a return in 2009, 2010, and the first half of 2011. The Dow at it’s high a few months ago had a two year return above 100% from the low in March of 2009.
I’m a former trust officer and for most of my career have worked with clients above 65. This is a delicate subject for the comment section, but I would not sleep well if I didn’t mention it. If your mom is getting up in years, some of what you are describing might be attributable to age. I had a friend whose father donated all of his millions to charity and accidentally dis-inherited his kids due to age related dementia (he was 92). The family had no idea but looking back they remembered a few odd decisions he had made in his late 80’s.
This is purely for your consideration and I only mention it due to past experiences and because others may need this type of information. No offense intended and there is no basis for any assumptions on my part given the information you provided. Most investors and professionals are struggling to find a strategy that fits the current economy. Your mom is probably sharp as a tack and doing what she feels is best.
It is definitely something that worries me a bit but she knows what she is doing. I faith in her. She is only in her early 50s and has already retired. Thanks for sharing your info and experiences. I always learn a lot from you.
I certainly think having a little bit of gold in an investment portfolio is worthwhile. Five to ten percent is not a bad percentage, although admittedly to start thinking of it now seems a little late.
Cashflowmantra,
I know exactly what you mean. I did not move any of my clients into gold and I’m not about to do it now!