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Gold, or Fool's Gold?

With the world mired in geopolitical and economic uncertainty, investors' thoughts turn to gold, which may seem like a smarter investment than stocks.

And recent corporate scandals make gold that much more appealing. (After all, gold's CEO won't treat himself to lavish compensation while destroying gold's value.)

But inform yourself before you sell everything you own to buy a chunk of Fort Knox. All does not glitter in the world of gold.

Gold used to be the backbone of many national currencies, but for several decades now, that connection has been severed. The price of gold now reflects just supply and demand.

Gold doesn't have an impressive history as a great investment, either. From Jeremy Siegel's seminal book, Stocks For the Long Run, here's what a dollar invested in various things would have grown to, from 1802 to 2001 (Yes, just about 200 years!):

               not adj. adj.
for inflationfor infl.Stocks $8.8 million $599,605.00 Bonds 13,975.00 952.00 Bills 4,455.00 304.00 Gold 14.38 0.98

Over 200 years, through many wars and economic times even more troubling than those we face today, gold didn't prove to be a great long-term investment. In Fortune magazine, David Rynecki writes, "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." He adds: "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."

So, how do you invest in gold in the first place? Well, here are several options, as described by David Kathman of Morningstar:

  • Gold stocks (often very volatile, combining the volatility of gold with the riskiness of a business)
  • Gold mutual funds (generally less volatile than stocks, but still rather volatile)
  • Gold accounts (purchased through bullion banks, usually with large minimum investments)
  • Chunks of gold (in coin or bar form, which have to be stored somewhere safe)
  • Gold certificates and pool accounts (available for those who wish to buy small amounts)

Kathman notes, "Returns aren't the point when you're investing in gold; diversification is... A small amount of gold alongside your stocks can be a stabilizer." He suggests considering these funds: American Century Global Gold(Nasdaq: BGEIX), Vanguard Precious Metals(Nasdaq: VGPMX) and Fidelity Select Gold(Nasdaq: FSAGX).

Learn more about investing in gold from the (somewhat biased) World Gold Council and from this vintage Fool article. Or drop by our Mining and Metals discussion board.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 25, 2012, at 11:24 AM, puzzler11 wrote:

    So... what has changed about investing in gold in the last 9 years? Is this a good time to invest in gold? How much of your portfolio should be in gold?


  • Report this Comment On September 10, 2012, at 10:31 PM, NickD wrote:

    Dow 1900 66

    gold 1900 20

    Dow paid dividends

    gold paid nothing its just gold

    Dow 112 years later 13254

    gold 112 years later 1727


  • Report this Comment On May 10, 2013, at 8:58 AM, IvanaMoscow wrote:

    Hmmm...with the gold having a difficult time, is diamond a good alternative???

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