Last Updated Nov 11, 2010 5:17 PM EST
A near perfect storm of global economic anxiety has pushed the price of gold to a record high of more than $1,400 an ounce. In just the past week, the price of the precious metal has risen 4.5 percent following the announcement of the Federal Reserve's $600 billion quantitative easing policy. And that's just a continuation of a longer-term trend; below is the performance of the SPDR GLD exchange-traded fund, which essentially tracks the price of gold, since late 2008.
Despite that fast and furious rise, some gold watchers expect the price of gold to keep climbing to $1,500 by the end of the year. And Goldman Sachs recently said gold could reach $1,650 an ounce over the next 12 months. So is now a good time to be a gold bug or is this likely to be a sucker's time to buy gold? Here's what you need to understand about the latest gold rush:
When the world worries, the price of gold spikes. Gold is the safe-haven refuge investors and governments flock to when they get antsy. And right now there is plenty to fret over. The Federal Reserve's recent announcement of its $600 billion QE2 buying binge has had the double whammy of sending the value of the U.S. dollar down while raising fears that inflation will come roaring back. When either of those factors kick in, gold soars. We've also got nagging concerns over how well governments saddled with debt will be able to cope. It's not just here in the U.S.; plenty of eyes are focused on the fiscal woes of countries such as Greece and Ireland. And later this week when the G20 Summit convenes in South Korea, there will be plenty of discussion on global currency tensions. U.S. trade partners are none too pleased about what the falling dollar may do to their export trade, and that has raised some thought of whether the dollar should remain the primary "reserve" currency for the world. In a recent Financial Times op-ed piece, World Bank president Robert Zoellick threw some fuel on the fire when he suggested gold might be a good "reference point" when determining global monetary policy; his message has been somewhat taken out of context as calling for a return to the gold standard. But that nuance was surely missed by the gold bugs yesterday. Still, as long as a weak dollar and inflation concerns are in play, gold isn't likely to crater anytime soon.
It's not really at an all-time high. Yes $1,420 an ounce is the highest nominal price in dollars gold has ever reached. But in inflation-adjusted terms, gold at $1,420 an ounce is still about 50 percent below its March 1980 level when it rose above $820 an ounce. For the price of gold today to reach an all-time inflation-adjusted high, it would need to climb past $2,200 an ounce. I, for one, am hoping we don't get anywhere near that real-dollar record, as it would signal serious problems throughout the global economy. When gold reached its March 1980 high, inflation in the United States was above 14 percent. Just saying.
How to play gold as an investment. Gold is a smart way to hedge against a weak dollar and rising inflation. But it should never be a central piece of your investment portfolio; commodities in general -- including oil and other precious metals -- shouldn't be more than 5 percent or so of your overall portfolio. If you aren't there yet, then adding gold, or a commodity fund, can provide good diversification to your portfolio. Just don't buy into it today as a get-rich quick scheme; my MoneyWatch colleague Allan Roth offers up a personal explanation of why that's not wise. Or if you're like CBS MoneyWatch blogger (and former gold options trader) Jill Schlesinger and have been investing in gold already, now might be a good time to take profits so it doesn't become too large a part of your portfolio. It's the same principle as why in March 2000 it wasn't so smart to have a portfolio full of growthy tech stocks. As for specific ways to invest in gold, here are some thoughts:
- Use exchanged-traded funds. Until a few years ago, the only way to buy gold bullion was to take physical possession of it and then tuck it under the mattress or in the bank safety deposit box. Now you can invest directly via exchange-traded funds. Shares in the SPDR Gold exchange-traded fund (GLD) and the iShares Comex Gold ETF (IAU) give you a direct stake in gold bullion that the ETF sponsor holds in reserve.
- Be careful about buying gold coins. If you like the idea of owning the gold outright -- perhaps as a holiday gift for the kids and grandkids that also packs some investment value -- buy carefully. You want to avoid the late-night television come-ons that over-hype "rare" coins that aren't, or add a huge mark up to your cost. MoneyWatch's Kathy Kristof has a great piece on how to buy gold coins without getting ripped off. For starters, you can find a legitimate gold dealer through the website of the Professional Numismatists Guild.
- Don't wait to buy gold jewelry. To state the obvious, the run-up in gold prices couldn't have been timed worse. The National Federation of Retailers estimates that requests for jewelry gifts will increase 13 percent this year. And if it's gold that's being requested, retail prices could be 30 percent higher than the year before. If you are hell-bent on buying that someone special a piece of gold jewelry for Christmas, buy now rather than wait. The factors that have pushed gold to its recent high aren't going to vanish between now and Christmas, so don't sit around waiting for any sales. Another option is to set your sights on less-expensive precious metal jewelry; apparently platinum wedding bands have become the value play among the soon-to-be-betrothed. Or if you're looking to raise some cash for holiday spending, and you've got a few gold pieces sitting in your bureau that you could easily part with, now's a fine time to sell. Once again, work with a reputable dealer or pawn shop in your town, and avoid the mail-in gold buying firms.
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