Wes Moss: Are you buying gold? Should you?

Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.

Wes-Moss-032011-USE-THIS-VERSIONMaybe I listen to too much financial radio, but I’m getting tired of those commercials hocking gold. Some of them make no sense:

“Convert your old, forgotten paper 401(k) into a pot of solid gold!”

Who forgets about their 401(k)? It’s most Americans’ largest asset after their home. And why are your 401(k) investments sinking? The market is up almost 100 percent the last two years.

Other ads try to scare you into owning gold:

“National debt, unemployment, inflation, the housing crisis, China taking over as an economic power, all attacking your assets. And the only solution is gold, gold and more gold!”

Gold parties and gold stores everywhere. Is gold the answer to inflation, deflation, a falling stock market and whatever else might happen?

There are legitimate reasons to own gold, among them:

1. Gold prices should rise as the dollar’s value falls. With the government piling up debt and Federal Reserve pumping excess money into the system, you can imagine the value of the dollar falling.

2. Gold can be a hedge against global crises. It’s understandable; we’ve experienced two major recessions and two bear markets in the past decade.

3. With gold above $1,485 an ounce as of late Friday, it is still shy of its inflation-adjusted high of $2,000-plus in the early 1980s.

But there are also reasons not to own gold, including:

1. You are betting on investor emotion — fear — which can change swiftly. With more than $50 billion just in SPDR Gold Trust (or GLD, the largest gold-based ETF — exchange traded fund), investors could quickly sell an enormous amount, creating a huge supply shift.

2. Higher prices have led to new gold mining, which could bring a supply surge and price drop.

3. Gold pays no dividend, and costs money to store.

So, should you join the gold rush or not?

I think the folks at First Eagle Funds have the right answer: Own some gold as a hedge. They added gold to their portfolios long before it was popular, and still maintain around 10 percent of their holdings in physical gold.

But just because gold has gone up the past 10 years, it doesn’t mean it will always go up, as gold, like most other investments, is highly cyclical. One thing’s definite at this point: When it seems four of five commercials are pushing gold, you’re sure not early to the party.

Have you purchased gold lately? As coins or through an ETF? Or have you been selling any gold?

Finally, are you tired, like me, of those darn gold commercials?

– By Wes Moss, for Atlanta Bargain Hunter

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7 comments Add your comment

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andy marino

April 18th, 2011
7:13 am

i can see by the look on your face in the picture up top you wish you had more gold

The Fixer

April 18th, 2011
7:22 am

I’ve been unwinding my gold position and buying physical silver as well as gold/silver stocks for our 401k portfolio. Gold is the currency of Kings & silver is the currency of Gentleman. There is a massive silver shortage and if everyone who bought silver demanded to take physical delivery of the shiny stuff then prices will shoot through the roof because they do not have enough silver above ground to satisfy all the paper contracts. The dollar is dead & that’s why our future rests in the hands of gold and silver. The day they quit trading oil in the US DOLLAR is the day we see $2000 gold and $200 silver. It will be here much sooner than later!!
GLTA!!

SheeshLouise

April 18th, 2011
8:02 am

I hate the shipping costs, but I take physical silver buillion. I want my stuff in hand. I only have about 68 oz. now. Got in a little more than a year or so at $14.53 and wish I had taken a larger position though, but I am on a budget. It’s like $43 now, with my last purchase being at $27 but with shipping costs made it around $30. I’m still up nicely though. Would like to go more but a little scared I feel like it’s going to bubble. Funny thing is…when it reached $20 I pulled back some. I recall back in like ‘03 when it was only $8 /oz. and I told me wife how cool it would to just pickup an ounce a month…and never did because I couldn’t find anyone at the time to sell me small amounts within my budget. I’m kicking myself now…The psychology of this thing is crazy. But yeah…gimme mine, no “imaginary” buillion for me. Too many snakes and shell games out here.

MLD

April 18th, 2011
9:49 am

I think its funny how all of my friends are getting into commodities now. These are the same guys who lost money on the dot-coms and then lost money on guaranteed investment property on the coast in FLA “because they don’t make any more ocean front property”. Commodities are the next hot thing that is going to come down. Even if China is growing along with with the others, for commodities to go up further than where they are today, China has to continue building as they are now PLUS add MORE building…….They already have all of the cranes in the world working over there….at some point they will build all the buildings that are needed in Shanghai and then they will just re-deploy the same commodity usage and resources to roads or other citiee…..it is doubtful that they will DOUBLE the building, they will just change the locations where the building is occurring.

Jeff

April 18th, 2011
9:59 am

I agree that it is late in the game to be jumping in. Yes, gold prices will probably go higher in the short term, but you’ve already missed the big run-up, and you’re more likely to be getting in near the top. As Wes says, gold prices are cyclical. If anything, the hucksters on TV should give you a clue that it’s not a good idea. I bought a little gold in the 90’s and started selling it in December – at a large profit – to pay off debt. I’m looking to SELL near the top, not buy.

DW

April 19th, 2011
3:25 pm

Agreed its wise to own a small amount as a hedge but thats about it