Should I Buy Gold?
by: Brian Cheek Investors often ask me, " Should I buy gold ?" The answer is simple, in my opinion: Gold should be a part of every investor's portfolio. Whether or not you believe gold is going to appreciate short term or not is a matter for speculators, but smart investors who want a diversified portfolio will want to own gold for its protective qualities. Gold is a wonderful diversifier, and it offers protection against many adverse events in the marketplace, as we will discuss below.
Why Should I Buy Gold?
Gold adds another layer to a portfolio filled with stocks and bonds. Gold is a completely different asset class than stocks are. Even the ETF that trades like a stock behaves like godl because it is tied to the price of bullion. When compared to the stock market, gold has behaved in a roughly inverse fashion to the stock market since 1971 when the gold standard was abandoned. For traditional buy and hold investors, gold can provide returns when the stock market underperforms.
Gold Offers Protection of Value
Gold protects against inflation. Inflation occurs when the money supply is increased, causing each unit of currency to be worth less. Then this happens, prices for goods and services will rise. This will cause the price of gold to rise as well, because it will take more of the dollars (which are each worth less due to inflation) to buy an ounce of gold. The stronger the inflation, the faster gold will rise. Many investors keep some gold in their portfolio for just this reason.
Gold Investors are Prepared for Disasters
Since the economy of every nation (and the worldwide economy) is based on trust, it can collapse when that trust is eroded. Think about this: the paper that money is printed on is not worth anything. It is worth value because of the trust that people have in the government and the economic system. As soon as a nation defaults on its debt, the money becomes worthless-it is literally not worth the paper on which it is printed. Gold, however, will always be worth something. In this way, it is currency. So, some people like to have gold around as a protection against a bank failure, a war, civil unrest, or severe political climate changes or any other disaster that might cause a currency decline or failure. Indeed, history shows that when a nation is facing war, economic or political uncertainty, or a financial crisis, the demand for gold rises sharply.
Know Your Investment Strategy
You have to decide what type of investor you are, so that you can determine how to work gold into your portfolio. For instance, if you are risk averse, and you do not want to store gold in your house, then you may want to get a gold account, gold certificate, or buy shares of the gold ETF. If you feel gold will appreciate in the long run, and you want to reap higher rewards, you can invest in mining stocks and the gold miners ETF, both of which are leveraged, meaning they multiply advances and declines in the gold price. For a buy and hold investor with average risk tolerance, 25-30% of a portfolio invested in gold is reasonable. A more speculative investor may choose to hold a higher percentage in gold, and use more leveraged instruments like gold stocks and futures. There is no right or wrong amount of gold to hold. There is only the amount that is right for you.
Knowing Where to Buy Gold
Owning gold has never been easier than it is today. Once you know your strategy, then you can start to pick out which investment vehicles make the most sense to you. There are many ways to own it, several of which can be done with clicks of a mouse. You can, of course, opt for gold bullion or gold coin ownership. If you want to own it but have someone else take possession of it, then gold accounts and/or gold certificates are for you. If you want to trade it like a stock, then the gold ETF will be your choice. For those who want a little more risk with the potential for higher rewards, there are gold mining stocks, the gold miner's ETF and leveraged ETF funds.
About The Author
Brian is an expert on gold investing and gold prospecting. His website, The Gold Spot is a comprehensive guide for gold investors and gold mining hobbyists.
For more information on gold buying decisions, go to Should I Buy Gold?