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Should you join the gold rush?

By Judy Martel · Bankrate.com
Thursday, April 21, 2011
Posted: 5 pm ET

There's an old investment saying that smart money should never follow dumb money. In other words, when an investment class gets too pricey because other investors have been rushing in, it's not the time to buy.

Which brings us to gold: If you've had gold in your portfolio to counterbalance the fluctuations of the stock market, you've had a nice ride. Last week it topped $1,500 an ounce. So if your portfolio lacks gold, is the price too high to add it now?

Gold has traditionally been considered a good hedge against inflation and stock market volatility, and fears have been rising as economic instability continues. But gold shouldn't be considered stable. It is a volatile investment -- during the 1980s and 1990s, the price dropped pretty substantially, and if you buy now, when it's expensive, you could suffer losses. If you buy gold through an exchange-traded fund, or ETF, you will also pay fees, and if you buy bullion or coins, you'll pay storage costs.

There are other hedging strategies besides gold. Treasury securities are a counterbalance to stocks, but they are also expensive right now. Bonds are a good choice, and international funds can also help even out returns. The point is to have a well-diversified portfolio that includes a variety of assets, so that in the short term and the long term your wins will balance any losses.

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April 22, 2011 at 12:51 pm

Today, I am happy I "purchased gold" in the form of shares in the Central Fund of Canada (CEF on the AMEX). I chose CEF because almost all of their holdings are in gold bars and bullion rather than gold mining, which is risky. Look for bullion holdings vs. mining focus if you are interested in purchasing "gold shares."

It also helps to purchase early, when gold prices are low. I bought my CEF shares in late 2006 as the housing market crash was beginning. I figured people would begin, and continue to, panic and drive up gold prices as a result. I have nearly tripled my investment, sold more than half my shares at a high price yesterday, and am very pleased with the outcome. Tripling my investment sure beats the going interest rates over the same five-year period.

April 22, 2011 at 12:01 am

Another consideration is the amount gold can be sold for. The very very best dealers I have found pay 93% spot on coins that can be purchased for 4% to 7% over spot. This can wipe out gain.