Investing in Gold

During 1999, the gold frenzy was white hot. Through virtually any communication medium, gold was touted as the recommended solution to volatility and potential disaster. I swallowed that promotional pill and did some research. Ultimately I purchased a selection of rare, collectors gold coins to hold long term.

The past couple of years have brought a renewal of the flight to gold with all the same reasons as before. Uncertainty and volatility in almost every market coupled with high unemployment creates a sense of impending disaster and moves investors to seek the perceived stability of gold as a hedge.

Gold & Silver Investment with Inflation & Deflation Explained by David Morgan – YouTube

Unfortunately an emotion based flight to gold often leads to an investment portfolio that is out of balance and the personal sense of safety turns out to be an illusion for many investors.

Here are the gold facts…

First, like any other commodity or investment for that matter, gold experiences short term volatility and investment returns over the long term are poor. For example, if you include the gains achieved last year, investment results are relatively flat over the past 30 years.

Since controls on the price of gold were removed in 1973, gold has enjoyed a cumulative 983% return which is an annualized rate of just 6.8% while global stocks achieved a 9.1% annualized return and US stocks alone achieved10.5% return. And if you examine the gold to stock comparison of returns in 2009, stocks outperformed gold 30% versus 24.8%.

Historically, when gold experiences a short term boom which has happened only 6 times over the past 37 years, the boom drives virtually all the cumulative results. In other words, without the 6 boom periods for gold, the return amounts to -3.6% annualized. If you are not highly accurate predicting the beginning and end of the relatively infrequent boom times for gold, you will find yourself with an asset with little or no growth in real value.

If you evaluate gold from a supply and demand perspective as we do other commodities, you will find that more than 65% of demand comes from buyers from the jewelry market. Certainly market uncertainty drives the emotional appeal for gold but over time as prices rise, demand for retail jewelry will decline and the fundamental market drivers will fall with nothing to support long term price growth. Last year alone, demand from the core jewelry market declined an estimated 23% alone.

Does this give you strong confidence to hold gold long term?

For many seniors, gold is more than just a safety blanket. When our wealth and financial safety is nothing more than an electronic account, it feels good to hold a tangible asset that you can use in a worst case scenario.

The lesson here is do not lose sight of why you are buying gold and do not allow your investment portfolio to get over-weighted with gold if you expect to maximize long term returns.

_________________________________________________________________________________________
About The Author:

For more than 20 years, Karl Edmunds has been a noted author within the business and management consulting arena. As a senior, he now engages his curiosity and observations about life to write about key issues of importance to the growing community of seniors (Boomers), and the value of living life to the fullest every single day. Give me your comments and suggests at http://plan-retirement.org or http://For-Seniors.org