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Should Gold Have a Place in Your Portfolio? |
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If you follow the financial news, you may have noticed a recurring theme of gold trading at or near a new high. Before deciding whether gold has a place within your portfolio, make sure you understand the factors that drive demand as well as how gold historically has complemented other financial assets.
Recent Trends
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, concerns about the potential for sovereign debt defaults, and fears about the potential for a "double dip" recession.1
All of these concerns have driven the price of gold to all-time highs. But is this recent surge justified or are bullish "gold bugs" inflating a bubble that will soon pop?
Those who question current valuations point to the period between January 1979 and January 1980, when the price of gold more than tripled from $227 to $678 an ounce. As valuations subsequently declined, investors who purchased gold at its January 1980 inflation-adjusted peak would have had to wait until April 2007 -- more than 27 years -- to break even.2 This example does not mean that gold is set to take another fall, but it points to the investment risk of purchasing an asset that has experienced significant surges in value.
Ways to Buy Gold
There are three ways to include gold within an investment portfolio: gold bullion, stocks or bonds issued by companies in gold-related industries, and pooled investments such as mutual funds.
| Type of Asset |
How It Works |
Considerations |
| Bullion (jewelry, coins, or bars) |
Typically purchased or sold through a gold dealer. |
Prices offered by dealers may not be uniform and may not reflect published prices on the London fix. Less liquid than other forms of gold. Need to arrange for storage, insurance, and other safeguards. |
| Stocks or bonds issued by companies in gold-related industries |
Purchased through a financial advisor or directly through a brokerage firm. Pricing data widely available. Depending on the security, may have high degree of liquidity. |
Performance is influenced by trends in the stock market. Trading fees will apply. Investing in stocks involves risk, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. |
| Mutual funds |
Purchased directly through the mutual fund company or through a financial intermediary (such as an investment advisory or brokerage firm). Pricing data widely available. Usually have high degree of liquidity. |
Performance is influenced by trends in the stock market. Trading fees may apply as well as expenses such as front- and back-end loads, management fees, administrative fees, short-term redemption fees, and continuous deferred compensation charges. Investing in mutual funds involves risk, including loss of principal. |
If you are 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 -- including domestic stocks, U.S. government bonds, foreign stocks, REITs, and cash -- has been low, meaning that if these assets decline in value, gold may hold steady or increase, helping to reduce a portfolio's overall volatility.3
1 Source: Gold Supply and Demand Q1 2010, World Gold Council and GFMS Ltd.
2 Source: Standard & Poor's. Gold is represented by the 4 p.m. London fix.
3 Source: Standard & Poor's. Gold is represented by the 4 p.m. London fix,
foreign stocks by the Morgan Stanley Capital International EAFE Index, real estate by the NAREIT Equity REIT Index, cash by a composite of the yields on 3-month Treasury Bills and the Barclays 3-Month Treasury Bill Index, domestic stocks by the S&P 500, domestic bonds by the Barclays U.S. Government Bond Index. For the period beginning January 2, 1973, through June 30, 2010. Past performance does not guarantee future results.
© 2010 Standard & Poor's Financial Communications. All rights reserved.
©2010, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement
Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.
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