Show #344 Airing Sunday, 6/4/06
This past year, gold investments have added glitter to investors' portfolios. But does that mean you will automatically have the Midas touch if you invest in gold? Here to mine the answer is Jim Lineweaver, founder of the Lineweaver Financial Group.
Question: The price of gold has appreciated greatly recently, so much so that it's getting a lot of coverage in the press. Is now the time to consider an investment in gold?
Answer: It is important to look at all things in a historical context when making decisions. If you look at the price of gold and how it has changed over the past year, you'd think, "wow, it looks like a great investment." And that often causes people to want to get on the band wagon.
A year ago gold was trading at around $420 per ounce, and today it is trading at $620 an ounce. That is a big change, in the area of a return, of 45% over the past year. Numbers like that frequently attract people's attention, and get them all excited. They start to make investment decisions based on emotions, and that is a formula for disaster.
Question: So because of the recent surge in the price of gold, now may not be an opportune time to invest in it. How about the long-term prospect for this type of investment?
Answer: That's a very good question. Again, we need to put things in perspective before we make a decision. Gold sold in 1980 at $850 per ounce. Compare that price to today's price, and it certainly doesn't looks like a good investment. The 1980 price was an all-time high for gold, and back then there was this mania about investing in gold similar to what we are seeing today. If you bought gold at its peak in 1980, you still haven't recovered your investment.
In his book Stocks for the Long Run author Jeremy Siegel points out that a dollar invested in gold 200 years ago would be worth about one dollar today after adjusting for inflation. That same dollar invested in stocks would be worth $600,000, again adjusted for inflation.
Keep in mind, that if you are investing in gold, you are investing in a commodity, which can be very risky, even speculative. By speculative, that means you can lose all of your investment. You need to be comfortable with that prospect before you consider any investment in commodities.
Question: Let's say someone is still convinced they want to invest in gold. Are there different ways to invest in this commodity?
Answer: There are different avenues to use to invest in gold, and they can have different costs and risks associated with them.
Some people want to be able to touch and feel there investments in a precious metal. If that's you, you can invest in gold coins like Krugerrands or the American Eagle. You can look at it, hold it, but then make sure you have a very secure place to store them. And you better have a conversation with you insurance agent to make sure you have coverage on them. The commissions on this type of can be very high.
If you aren't interested in holding gold coins, you can make an investment in a fund that just buys gold bullion. You don't have to worry about storing or insuring the bullion-they do that for you.
You can purchase the stock of a company that mines gold; however, that adds an additional level of risk to your investment. Not only do you have the underlying commodity price, but now you have the risk associated with that particular company.
Concerned about having your investment with just one gold mining company, or in just one precious commodity? Then maybe you would want to consider an investment in a mutual fund that specializes in gold mining stocks, or adds other precious metal mining companies to its portfolio.
The bottom line is to just be very careful. There are a lot of ads you will see that make it sound like a good investment, and it has been over the past year. But put in the right perspective, I'm not sure it's appropriate for most viewers out there.
And remember, having the right asset allocation can help you meet your present as well as your long term goals.
So is investing in gold a golden opportunity? Or will it test our mettle? For more information, give Jim a call.
