GOLD HOLIDAY SHOPPING
By Dan Greenshields SEATTLE (MarketWatch) — Holiday shopping have you in a quandary? Having trouble deciding on that perfect gift? Think gold. It could make the shopping season a bit easier. Whether you choose gold jewelry or the gift of gold in the form of stock, gold is a truly precious metal and there are some things you need to know before you head off to the investment mine. Daily media accounts show that gold is hitting new all-time highs on a weekly basis, even when adjusting for inflation. Ever-cautious investors continue to ask: Have gold prices hit their peak? Will a shift in economic policy by the Federal Reserve strengthen the dollar and cause gold’s value to fall? If the “gold” option resonates with you, there are some facts you should know. Investors generally keep a portion of their portfolios in gold for four “elemental” reasons: Gold’s unique properties make it valuable in many ways — from powering cell phones and computers to being a perfect crown on a tooth. It is a unique asset, and because its financial performance is not strongly correlated to stocks, bonds or real estate, it can provide investors with another method of diversification. Besides its natural beauty, gold is nearly the perfect element for manufacturing fine jewelry because of its ability to be shaped and never lose its luster.
Some form of gold jewelry is always in fashion. It can easily be made into a ring, bracelets, or necklace — practically anything. Gold is rare and virtually indestructible. These two features have made it a treasured commodity dating back to early Mediterranean cultures in 3000 B.C. when gold served as both jewelry and currency. Gold has outlived most governments and fiscal policies. Gold can’t be easily substituted. Because it’s rare and highly valued, central banks and some governments use it to back their currencies. Only 161,000 tons of gold have ever been extracted from the earth, barely enough to fill two Olympic-size swimming pools, according to National Geographic. Owning gold: How much is too much? As the song goes, “you got to know when to hold ’em, know when to fold ’em.” Gold deserves a place in most long-term portfolios. Historically, investing in gold has been difficult, expensive and limited to buying and selling gold coins or bars or speculating using short-term gold futures contracts. Now, investors can easily make sizeable long-term investments in the value of gold through exchange traded funds (ETFs), an example being SPDR Gold Trust ETF (GLD 115.75, +0.11, +0.10%) . Investors can also create an effective short or options position on exchange traded funds. Still, the rule of thumb for investing in gold is generally 5% to 15% of a portfolio, depending on an investor’s time horizon and goals. Since 1973, gold has provided a Real Annual Return of 1.8%. More recently, it has been on a market tear, returning 19.7% in compounded annualized returns since November, 2004.
What’s next for gold? Gold has been a good performer the last five years and a smart investment. But as the price continues to rise above $1,100 an ounce, investors need to be aware before investing. As with all things, as the price rises, demand will fall for gold, especially for use in fine jewelry. Fine jewelry accounts for about two-thirds of total demand for gold. It’s possible that new supplies of gold could enter the market and drive the prices down from either central bank sales or speculator selling. More supply could be found in the form of reusable scraps of gold entering the market from consumers’ recycling efforts. How will you know if you strike gold? It’s difficult to predict. Investors should weigh the risks and benefits before committing to new purchases of gold. Gold is in an asset class all its own. So as the holidays approach, gold could be the perfect holiday gift for some — no matter if it’s in the form a gold bracelet, a gold watch or ownership in an exchange traded fund. Greenshields, CFA, is president of ShareBuilder Securities Corp., a subsidiary of ING DIRECT USA.