Buy Gold?

An ounce of gold crossed the $1,300 threshold yesterday and has appreciated over 350% since 2000.  Is now the time to buy?  Many money managers and large institutions have been aggressively buying exchange-traded funds (mutual fund-like trading vehicles) and physical gold (coins and bullion).  Companies are buying storage capacity, coin dealers are charging premiums, volatility measures suggest people are not just speculating but hanging onto their gold and more professionals are switching to ongoing bullish forecasts.


Q: Should you buy gold?
A: Perhaps, but only for the right reasons.


First, most homeowner's insurance policies severely limit the amount of money, silverware, goldware and coin collections to a few hundred dollars.  Additional amounts you can cover under a separate Personal Articles Policy but bullion is generally not covered.  You would be best served placing these types of assets in a bank safe deposit box.  There are ongoing expenses for this service plus you won't have 24/7 access.  Transporting gold is burdensome and not immediately marketable unless through a dealer.  You would also have to be familiar with the current market rates for your bullion and coins.


Second, you can access gold and other commodities via ETFs, mutual funds, and the commodities futures markets.  There are costs and taxes for buying and selling but you generally have greater liquidity.  The big caveat here is: know what you are buying.  When retail investors mix with big institutions, hedge funds and other professional money  managers, you are at a decided disadvantage.  Commodities are volatile and big players can move markets... or have them move against them in a hurry.  They place large trades, have better information and teams of analysts and traders to take advantage of inefficiencies in the markets.  You also have to know there are significant differences whether you are buying a futures contract, gold bullion, stock in a mining company, how much leverage is involved and the history of the manager.


Third, perhaps the most important question: why has gold run up in price?  The two main reasons are ongoing worries about another U.S. or global recession and devalued currencies.  People have been buyers of gold throughout this recession. Gold is traditionally thought of  has a safe haven and even more so with the falling value of the dollar.    The pros said we hit the top around $1,100.  Today, many are capitulating and changing their tunes.  Currently, there is great momentum with gold.  However, the signs of mania in the gold market are clearly there. Troubling is that jewelry and industrial demand has weakened, the US government may have to intervene again and buy more debt (inflationary/weaken the dollar), and our low domestic interest rates will continue to weaken our currency.  The conditions that created this environment may be fleeting and fickle.  A new economic report could change sentiment very quickly.  So, let the investor beware.


Long-term investors in gold and commodities would do well with a small tactical allocation.  Identifying the right type of investment, the costs and risks would, however, best help investors temper their expectations.