Investing in gold - The pros and cons

Speculators cause price swings

Generally, gold prices can be quite volatile. In fact, Holmes says that 70 percent of the time, it's a "nonevent" for the price of gold to rise or fall 15 percent in a 12-month period. In other words, investors can expect annual price swings of that magnitude or more much of the time. Gold stocks can experience even greater volatility than futures.

Some of that dramatic rising and falling is because of the involvement of central banks and speculative traders in the gold markets. That can mean positive or negative volatility for investors, depending on whether those banks and traders are buying or selling.

"Since the primary use of gold in an (investment) portfolio is as a hedge, it's important to think like a central banker. The more growth comes from areas of the world that have high savings, the more (the price of) gold is likely to continue to rise because those savings need to be put to work in nondollar instruments, which include gold and other hard assets," Hyzy says.

Gold as part of your portfolio

Holmes believes conservative investors should have 10 percent of their portfolio in gold and aggressive investors might want as much as 20 to 30 percent in this precious metal.

Hyzy isn't sold on that proposition. He says there's no hard evidence that individual investors own that much gold, and most people shouldn't have a big chunk of their wealth in any one company or commodity.

"You still have to understand that you shouldn't own too much of any one thing," he says.



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