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The Gold Rush to Nowhere

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It's sad but true: If there were no asset bubbles, investing would be a whole lot less exciting. After all, who wants to buy a boring old index fund and sit back and watch your earnings grow at the same rate as the rest of the market? No, investors want the stock that will double overnight or the mutual fund that focuses on the hottest and fastest-growing sector of the market. Folks are always on the lookout for the next hot new thing, and right now, they've got one in their sights.

Bandwagon now leaving the station
Anyone who has been paying even a sliver of attention to the investing world as of late is fully aware of the market's new darling -- gold. Gold bugs have been coming out of the woodwork, and TV commercials selling gold coins and offering ways to profit from the precious metal are filling the airwaves. All the attention is not surprising -- the price of gold has risen by nearly 30% in 2009 alone, and has more than doubled in the past four years. Gold-related stocks like Seabridge Gold (AMEX: SA  ) and Gammon Gold (NYSE: GRS  ) are up 93% and 113%, respectively, year-to-date.

And now investment managers are getting in on the act. According to a recent Wall Street Journal article, some fund skippers who hadn't given gold the time of day before are now adding the metal to their portfolios. Worries about the exploding federal deficit, an expanding monetary base, and future inflation have prompted them to hedge their bets with gold. Many managers who aren't buying physical gold bullion are instead stocking up on gold-mining companies. Yet many of them, such as Goldcorp (NYSE: GG  ) , AngloGold Ashanti (NYSE: AU  ) , and Yamana Gold (NYSE: AUY  ) , have outpaced the overall stock market so far this year -- prompting longer-term gold investors to take profits.

Amid all the debate, one thing is clear: Gold is definitely the trendy place to be right now.

Late to the party
But if you're thinking about going out and buying a gold bar or two to hedge against a global meltdown, hold your horses. If there's one thing you should remember, it's that once you start seeing late-night infomercials about "sure-thing" investing in a certain corner of the market, you can bet that the easy money has already been made.

Investors are notorious performance chasers, eager to pile into a hot area after a meaningful run-up has occurred. Gold is likely forming its own bubble, even if it is in the early stages. I don't think it's a bubble that will necessarily pop any time soon, nor do I think we'll have a repeat of the 1980s, when the price of gold plunged 90% from its peak. But if you're thinking about buying gold to make some easy profits, odds are good you've already missed most of the party.

Furthermore, if we look to history, gold simply has not produced solid long-term returns. Returns from a broad basket of stocks have left gold returns in the dust over long periods of time, going back decades. The truth is that gold can be an excellent diversifier and short-term hedge, but it hasn't made a great long-term investment in its own right when you look at it over a span of 20 years or more.

In times of economic uncertainty like we have seen in the past few years, it's not surprising that gold has shot through the roof. And if runaway inflation does take root in the U.S. or the global economy dips back down into recession, gold bugs will be well-insulated from these shocks. Investing in gold may be a good defensive move, but if you haven't already, you're not likely to make a whole lot of money from it.

Your golden opportunity
If you simply can't bear to be left out of the gold frenzy, make investments with your eyes open. Understand that you may be buying near the peak and that just because gold has been on a tear lately, that doesn't mean you'll see another 30% rise in 2010. Also consider that you may already have some indirect exposure to gold through some of your mutual fund holdings. According to the same Wall Street Journal article, the average large-cap growth fund now holds a 3% allocation to metals and mining stocks.

If you're looking for more direct equity exposure, think about investing in solid, mid-sized mining names like Canada-based Ivanhoe Mines (NYSE: IVN  ) . Ivanhoe boasts a strong international mining presence, especially in China, and has more upside growth potential than many of its larger mining counterparts.

If you want to more closely track the performance of gold bullion itself, consider an inexpensive exchange-traded fund like SPDR Gold Shares (NYSE: GLD  ) . Just keep exposure to such a fund to a very small portion of your overall portfolio.

We're likely to continue to hear a lot more about gold in the coming months, so it will take a lot of discipline to sit tight and not buy into the hype. Gold is an investment that has its uses, but it may have already run much of its course in this business cycle. For most investors, this is one gold rush you can live without.

For more insider investing and personal financial planning tips, take a look at the Fool's Rule Your Retirement service, which provides top-notch retirement and mutual fund advice. You can start your free 30-day trial today.

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (8)

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 December 16, 2009, at 1:34 AM, jennifergmd wrote:

    The advice on TMF re: gold is more the most part- completely sophmoric. My rule of thumb is that if someone did not call me and tell me that gold was on its way to $1200 from $500 or so, it is obvious that they did not understand the fundamentals of gold. So if they didn't tell me it was going to increase so much in the first place, why should I listen to them when they say it has peaked? Well... I shouldn't. And why in the world would I listen to someone who's investment advice is free? If I was so smart, I would have found a way to charge ( a lot) for my time and/or advice. You are hurting people who will get scared out of slowly building a position in gold at these prices.

  • Report this Comment On December 16, 2009, at 10:02 AM, rushbb wrote:

    "it may have already run much of its course in this business cycle" ?? The continuted devaluation of the dollar has run its course?? The government won't be printing any more money? You should go back to school. You obviously are under the control of the wall street gangs. Which isn't uncommon for CFAs I guess.

  • Report this Comment On December 16, 2009, at 4:10 PM, XMFSinchiruna wrote:
  • Report this Comment On December 17, 2009, at 1:13 PM, botfeeder wrote:

    It seems to me the rise in gold has been rather modest, not like the huge runups of those assets that have gone through bubbles in recent years.

    Also as others have pointed out the economic fundamentals favor rising gold prices.

    The economies of the US and other countries would collapse if the prop of currency devaluation were removed. That will remain the case for the forseeable future.

    Inflation is as close to a sure thing as the markets will ever give you.

    At some point gold will have a bear market. In the meantime there will be retraces during the bull phase. As far as the retracement currently going on, I say the more the merrier, because what price gold hits on a temporary blip down has no bearing on where it will be in the longer term based on fundamentals. A dip simply provides a nice short term buying opportunity.

    In the long run, gold may or may not crash. If western countries can stabilize their currencies at let us say 50% of what they are at now, they may be able to save the funny money system our global economy runs on.

    But that would be predicated on the US for example being able to ratchet down its budget deficits. I have a hard time seeing that happening.

    I think a likely scenario is that eventually creditor nations like China will demand as a condition for any more borrowing that the US back its currency in hard assets, presumably gold.

    Pundits have indicated that based on the amount of gold and paper money out there right now that would be a price of gold at something like 6-7 thousand dollars.

    If we have another 50% of currency devaluation before the day of reckoning, the switchover to a gold standard might occur at more like $12,000 per ounce.

  • Report this Comment On December 18, 2009, at 3:13 PM, Webuchadnezzar wrote:

    As the one poster pointed out, your article is naive at best, and could cause a lot of investors significant losses. Having failed to call the runup, you now call for a bubble because you do not understand the underlying cause of the runup to begin with. The flight from fiat currencies into precious metals is likely not over. Since you were only in second grade during the Carter era, you have not seen what happens when the public loses its faith in paper money and inflation takes off.

  • Report this Comment On December 19, 2009, at 4:27 AM, jc2811 wrote:

    VHGI Gold Files 8k Regarding $50,000,000.00 Treasure Gulch Gold Reserves

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