Gold rush: Investors play it safe

Investing in gold today

Despite the recent run-up in value, investing in gold is far from a sure thing for individual investors. While it can provide value to a portfolio as an asset that moves independently of the stock market, returns on gold have lagged behind inflation, Winmill says. For one thing, gold has high carrying costs.

"Unless you simply take delivery and keep it in your house, there's going to be storage cost, safekeeping. Some people insure it," Winmill says.

Investing in gold also may come with an opportunity cost, Winmill says. After all, if your money is locked up in gold, it can't be growing in stocks, bonds or other investments with above-inflation returns.

Despite its historically low returns over the past two centuries, prices have risen almost 18 percent per year during the last decade. The question is: When will they fall back to earth?

Brandt says that depends in part on the actions of the U.S. government.

If the economy begins showing signs of a more robust recovery, and the Fed stops injecting liquidity into the banking system through quantitative easing, gold could lose some of its value as a hedge against inflation and be dropped by some investors, Brandt says. Higher interest rates, which have weighed historically on gold prices, also could put the brakes on the current gold rush, he says.

A prolonged period of relative global peace and stability and an improvement in government balance sheets also could erode gold's value as a hedge against disaster.

A soft landing for gold?

But even if gold prices turn in the near future, Winmill predicts a softer landing for gold than in its last great bull market in the late '70s. The end of that run in January 1980 saw the price of gold drop from a high of $2,305 down to $1,692 (adjusted for inflation) in a single week, a decline of almost 27 percent.

Winmill says the recent buildup in gold prices has been more gradual than in the 1970s. While there eventually may be a speculative blowup in prices that could lead to a sudden fall, that has yet to happen on the same scale as the earlier period.

"It's a very, very liquid market, and it takes a little bit more than a few retail investors to move the price," Winmill says.


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