The pros and cons of investing in gold

Speculators cause price swings

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 due to 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.

How to buy gold

Investing in gold can occur in a number of ways, each subject to pros and cons. Here are four options.

  • Gold bars. Gold bars or coins can be bought through dealers, generally at a premium markup, Hyzy says. While bars have a certain cache and tactile appeal, the cost to transport, insure and securely store gold in this physical form can be steep. A standard gold bar measures 7 inches by 3 5/8 inches by 1 ¾ inches and weighs about 400 ounces, or 27 ½ pounds, according to the U.S. Mint website.
  • Gold futures. Gold is traded as a commodity on several exchanges. The price, usually measured in U.S dollars per troy ounce, is set twice daily with the traditional London gold price fix as the daily benchmark, according to the World Gold Council. A futures contract is an agreement to buy or sell a set amount of a specific commodity at a stated price on a specified future date. Futures contracts can be bought and sold on exchanges.
  • Gold stocks. Investors can purchase shares in publicly traded companies involved in gold mining and related enterprises. However, these companies' fortunes don't necessarily track with the price of gold, Hyzy says. That's because the companies' stocks are affected by their own business practices, and some investors use hedging strategies to protect against gold's price volatility.
  • Gold exchange-traded funds. The easiest way to buy into gold fever is to purchase ETFs that own gold bullion. Investors should be aware that investors around the world use gold ETFs to hedge their investments or speculate on gold prices, and the ETFs themselves can be more volatile than might be expected, Hyzy says.

Holmes believes conservative investors should have 10 percent of their portfolio in gold and aggressive investors might want as much as 20 percent 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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