Is It Time for Gold?

Last year, I wrote about gold, noting:

The price of gold recently hit a 16-year high, as the precious metal draws more and more interest from investors spooked by stocks and geopolitical uncertainty. Should you jump in and snap up some bullion? Well, maybe, but maybe not.

Today, nearly 20 months later, gold sits above $600 per ounce, having just a few months ago passed a 25-year high.

Gold, obviously, can be quite volatile. In the long run, it often doesn't prove to be a great investment. Sure, if you'd bought gold five years ago, you'd have more than doubled your money. But that doesn't mean buying it now will reap you the same results. (Besides, you'd have achieved nearly the same performance with stock in some not-so-glitzy companies, such as Procter & Gamble (NYSE: PG  ) or Best Buy (NYSE: BBY  ) .)

The big picture
In his seminal book Stocks for the Long Run, University of Pennsylvania finance professor Jeremy Siegel revealed what a dollar invested in various things would have grown to, from 1802 to 2001 -- yes, just about 200 years! (Amounts have been adjusted for inflation.)

  • Stocks: $599,605
  • Bonds: $952
  • Bills: $304
  • Gold: $0.98

Did you catch that? You would have lost two cents of your dollar in gold -- over 200 years.

In Fortune magazine a while back, David Rynecki wrote:

Gold investors are notoriously bad forecasters. From 1985 to 1987, for example, a collapse in the dollar boosted gold 76% and had many metalheads predicting an extended rally. Instead, the price fell 15% the very next year. ... Even bullish gold pros caution the average investor to put no more than 5% of a total portfolio into gold-related holdings and say it's safest to invest through funds.

Those are some good points: Don't put too much into gold, if you invest anything in it. And think about how you invest in it, since you have several options. Here are some of the many ways you can invest in gold:

  • Gold stocks. These can be especially volatile, because you're betting not only on the movement of gold prices, but also on the performance of the companies.
  • Gold mutual funds. These can be somewhat more stable, but they're still volatile. Some examples are American Century Global Gold (FUND: BGEIX  ) , the now-closed Vanguard Precious Metals (FUND: VGPMX  ) , and Fidelity Select Gold (FUND: FSAGX  ) . There are also gold-focused exchange-traded funds (ETFs), such as streetTRACKSGold Trust (NYSE: GLD  ) .
  • Chunks of gold. These might be in coin or bar form, and you'll have to store them somewhere safe.
  • Gold certificates. With gold certificates, you're not buying gold, but a promise to be paid gold at some time in the future.

Cautions
Still, be careful if you invest in gold. Financial planner Nancy Swain has reminded investors, "It's a commodity. ... When you get into precious metals, you really get into speculation."

Rochester Democrat and Chronicle writer Frank Bilovsky noted: "Going back to the early 1980s, gold peaked at more than $800 an ounce, and silver, buoyed by Nelson and Bunker Hunt's attempt to corner the market, touched $50 an ounce. Purchases at those prices would have left someone well in the hole after more than 20 years."

As Warren Buffett opined in a 1998 speech:

It gets dug out of the ground in Africa or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

Fools discuss
Over at our Investing Beginners discussion board, denizens recently discussed the value of investing in gold. Here are a few snippets:

Toreic asked: ". with the world such a mess, is gold a reasonable investment?"

Wrjohnston91283 replied:

Gold and oil, and other commodities, are generally considered riskier/more complicated investments. A company makes a profit (good ones at least) and each year they grow (hopefully) their profits. The value of that company is the present value of future profits, plus the value of whatever the company owns (very simplified). Commodities don't do anything. They are worth something because other people are willing to pay for them.

He then added some examples of investments:

  • "If you bought [gold in the] late 1970s (for $100 per ounce) and sold today ($600 per ounce), you would make 500%.
  • "If you bought BarrickGold (NYSE: ABX  ) in 1985 . and reinvested dividends, you would make almost 10,000%.
  • "If you invested in the stock market as a whole (the S&P 500) in late 1975, you would have a return of roughly 1,700%."

NYMogul explained how he made some money investing in gold but added, "Gold is good to hold as a hedge against inflation and world disasters, but in my opinion, there is no real way to gauge why it's going up. I find it to be a more speculative investment then equities."

Kahunacfa concurred, adding:

Gold is not really an investment. You buy it, then have to store it, usually not free. It pays no dividends. Gold is a speculation, not an investment.

And finally, wrjohnston91283 tacked on a last note:

Purchasing a gold mining company, however, is not speculating. Gold companies have been making profits for centuries. As long as the price of gold is more than their costs, they will make money. If you are seriously considering gold, I would consider purchasing a good mining company rather than the metal itself.

Read more on gold in these articles:

You can also learn more about investing in gold from the (somewhat biased) World Gold Council, and on our Mining and Metals discussion board.

If you're looking for promising mutual funds that invest in gold and/or stocks, grab afree sampleof ourMotley Fool Champion Fundsnewsletter. Its many recommended funds are topping the market indexes by an average of roughly eight percentage points, and its picks stand a good chance of outperforming gold in the long run.

Best Buy is aMotley Fool Stock Advisorrecommendation.

Longtime Fool contributorSelenaMaranjian'sfavorite discussion boards include Book Club, Eclectic Library, Television Banter, and Card & Board Games. She owns shares of no companies mentioned in this article. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.


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