Should gold have a place in your portfolio?
There are television commercials offering cash for gold as well as local and home businesses that are sprouting up everywhere to get in on the modern-day rush. However, before deciding whether gold has a place within your portfolio, make sure you understand the factors that drive demand as well as how gold has historically complemented other financial assets.
According to the World Gold Council, demand in 2010 has been driven by a growing desire for jewelry in China and India, strong interest from European and U.S. investors in the wake of economic instability, and fears about the potential for a double dip recession.
A weak dollar has also contributed to rising gold values. This is known to happen when the fed cuts rates, because it makes the dollar less attractive to overseas investors, which in turn helps push up gold prices. All of these concerns have driven gold to an all-time high, but is the recent surge justified, or are we inflating another bubble that might soon pop?
Those that question current valuations point to a period between January 1979 and January 1980. During that time, the price of gold more than tripled from $227 an ounce to $678 an ounce. As the price of gold subsequently declined, those investors who purchased gold at its January of 1980 inflation adjusted peak would have had to wait until April of 2007, more than 27 years, to break even. This, of course, does not necessarily mean that gold is set to take another fall, but it does point to the investment risk of purchasing an asset that has experienced a significant surge in value such as housing did in previous years as well as oil did in 2008.
If and when you start evaluating whether gold is a suitable investment given your situation, consider its potential diversification benefits when included in a portfolio along with other assets. Historically, the correlation between gold and other financial assets, such as domestic stocks, foreign stocks, government bonds, real estate investment trusts and cash, has been low. That means that if the above-mentioned assets declined in value, then gold might hold steady or increase which in turn helps reduce a portfolio’s overall volatility. And if you are thinking about investing in gold, do it carefully.
Make sure you talk with a qualified adviser who understands the gold markets and can help you make an educated decision about your next steps and what are the best ways to purchase gold, whether it is gold bullion, stocks or bonds issued by companies in the gold industry, or mutual funds that are targeted towards the gold industry.
No matter which direction you go, make sure you make your decisions based more on good information and less on emotion.
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