Tips For Investing In Gold

    Published: 06-16-2009
    Views: 92,987
    Financial advisor Ric Edelman provides his top tips for investing in gold.

    Ric Edelman: Gold has been getting an awful lot of attention lately, but investing in gold is anything but a sure thing. The truth is that gold is a speculative investment, the returns are not guaranteed.

    To help you understand this, let's take a look at the last gold rush, the late 1970's and early 1980's. Back then inflation was rampant. The government had just bailed out Chrysler with one-and-a-half billion dollar loan. Investors were flocking to gold. Well the media egged them on, pushing up the price to a record $850 an ounce according to the New York Mercantile Exchange.

    At the time, gold seemed like a can't-miss investment. Sounds like today, doesn't it? But, what happened next? Well the run up in price didn't last. Gold peaked in January 1980 and then prices fell and kept falling for nearly 20 years.

    Gold finally bottomed out about $253 an ounce in 1999. It took another seven and a half years for prices to get back to their 1980 high. Yeah, it took 27 years for investors who bought at the peak to get their initial investment back. And during that whole time, their gold paid no dividends, no interest no income, unlike stocks, bonds and real estate.

    So if you are worried that you are missing out by not investing in gold, you can relax, you might not be missing a thing. Many people buy gold as a hedge against inflation or a weak dollar. But the truth is that gold isn't guaranteed to protect you against either one.

    Let's look at inflation first. Remember the late 70's and early 80's. From 1979 through 1984, inflation is measured by the consumer price index rose 7.

    6% per year. But if you tried to beat inflation by owning gold during this period, you'd have been disappointed because gold price roses just 4% year, only about half as much.

    In fact you would have done much better if you would have invested in the stock market. The S&P 500 stock index rose over 15% each year compared to just 4% for gold.

    Now let's look at using gold to protect against a weak dollar. Again, it doesn't work. From 1988 through 1992 when Bloomberg says the dollar fell 8%, gold prices fell 29%. The lesson is clear; don't assume that gold is guaranteed to protect you from either inflation or a falling dollar.

    But that doesn't mean that you should never own gold. In fact gold does belong in a diversified portfolio, just like all asset classes do and not just gold, but all precious metals; silver, platinum, palladium and more. You should also own minerals like zinc, copper and other metals as well as commodities; oil and gas and timber.

    You shouldn't buy these assets because you think they are going to rise in value, but simply because they might at a time when other assets like stocks, bonds and real estate don't. So don't try to predict what's coming next, instead construct a diversified portfolio.