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The yellow metal can confound you just as it did in the Gold Rush.
Argh! Gold! Never has so precious an item caused me such frustration in the stock market. I am a pretty good trader. Yet I have been burned by gold time and time again. I rely a lot on technical analysis for trades, yet even TA doesn’t help me with gold trades.
I gave up trading gold and you should, too. There’s just no way to predict how it will move. I do, however, believe it has a tiny place in any long-term diversified portfolio.
If you haven’t held any gold in your portfolio — and have been beating your head against the wall as the precious metal has tripled since 2005 — it is not be too late to jump in. There are several overarching and compelling reasons to allocate some of your investment dollars to the yellow metal.
Inflation is commonly the excuse used to justify owning gold. I happen to subscribe to what’s called the Chapwood Index for inflation, which uses true apples-to-apples comparisons on the actual costs of goods in 50 major cities. It’s more accurate than the CPI, which the government always manipulates every few years. Inflation is off the charts, and that’s a really compelling reason to own gold.
Gold is an actual physical asset, just like real estate. It has intrinsic value. As a storehouse of value, it acts as a true hedge against inflation. The more the dollar weakens, the more of those dollars it takes to buy things. There’s also no end in sight to outrageous increase in inflation.
Devaluing the dollar creates another effect: Central banks around the world are less eager to hold dollars. Since the dollar had always been the world’s premier currency, the only asset beyond that is physical gold. That creates demand, and the more demand, the higher the price of gold.
There are a few other reasons to own gold. It’s the most liquid of the precious metals, so it’s easy to buy and sell. It’s safe from political instability, at home or abroad. And all of these things are going to be factors for a very long time.
So, what are the best ways to own gold? You can buy it via various stock investments.
Numerous ETFs are available, of which the most popular is SPDR Gold Shares (NYSE:GLD) which actually holds baskets of physical gold. Beware, however, that gold is considered a collectible and is taxed differently than a stock investment, and that difference does apply to this ETF.
Another way to go is to own gold mining companies. On the positive side, you are removing yourself one level from direct volatility in gold. On the negative side, these businesses are dependent on gold demand. I would choose a diversified ETF like the Market Vectors Gold Miners ETF (NYSE:GDX). The top ten holdings take up some 68% of the portfolio, so its not as diversified as I’d like, but it does give you the exposure to the metal.
You can also broaden out your exposure to precious metals with ETFS Physical White Metals Basket Shares (NYSE:WITE), whichoffers physical holdings of the white metals: platinum, palladium, and silver. The price of the ETF is based on the spot price of each metal less the Trust’s expenses. The allocation is 48.43% silver, 35.44% platinum, and 16.13% palladium.
Lawrence Meyers does not own shares in any security mentioned.
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