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Is Gold Right For You?


In general, gold and the dollar move in opposite directions. When the dollar is up, gold is down.

How – and why – you own gold may determine how much you profit by it.

Jon Nadler, an analyst at Kitco Bullion Dealers, suggests that individual investors view gold as an insurance policy rather than a way to turn a fast buck.

"Gold is a defensive play," Nadler says. "Owning gold is a way to preserve capital – it shouldn't be viewed as a speculative buy to make money."

In short, think of gold as an insurance policy. You hope you don't need it. But if you do, gold can stabilize or mitigate losses in other sectors of your portfolio.

In general, gold and the dollar move in opposite directions. When the dollar is up, gold is down. Since 2001, gold has more than doubled in value while the dollar continues to fall.

Gold looks like a good bet for the immediate future as a hedge against inflation driven by rising oil prices. Crude oil recently fetched $73.43 a barrel on the New York Mercantile Exchange, up 107.5% from $35.39 a barrel in September 2000, which was then the highest price since November 1990, just before the Gulf War.

If you take a long-term view, you can forget about gold's daily price fluctuations because, in the current economic climate, gold likely will continue to rise. Unlike paper investments, gold has intrinsic value that isn't linked to a company's performance. Converting gold to cash preserves your buying power.

Fine. But how do you play gold?

Nadler recommends 5% to 12% of your portfolio should be in gold and finds that in practice many of Kitco's clients hold 8% to 10% in the precious metal. One of our gold experts, Professor Lance Lewis, recommends that gold represent a maximum of 10% of a balanced portfolio.

Most neophytes interested in adding gold to their portfolio may want to consider ETFs. The streetTRACKS Gold Shares trade on the New York Stock Exchange, and the Comex Gold Trust trades on AMEX. Both offer new investors exposure to the price of gold. ETFs offer investors a convenient, low-cost way to invest in gold without getting lost in the intricacies of the spot market for gold.

There are also gold mutual funds, such as Fidelity Select Gold, American Century Global Gold and Vanguard Precious Metals. Investors get professional management, but like any mutual fund there's a fee involved.

Investors may want to consider mining company stocks such as Barrick Gold (ABX), Newmont Mining (NEM) and AngloGold Ashanti (AU). Similar companies trade on the Toronto Stock Exchange. Remember, futures and options aren't for the neophyte and you can get crushed on a margin call.

"Diversify if you hold gold mining stocks," says Lewis. "These aren't buy-and-hold stocks and require active management, usually in a mutual fund. Over time, the stocks generally outperform the metal."

Gold bullion has what some call the "fondle factor" but storing it is expensive and can erode your returns. That's after the broker's fee, which can vary widely so shop around if you buy gold. Remember that all fees are a bite out of your yield.

Check with your bank because the contents of a safe deposit box may not be insured. A true gold bug will stash a bar or two in a peanut butter jar and tuck it in the back of the fridge on the theory that no robber would think to look there. That's inconvenient, more than a little goofy and raises a basic question: If Armageddon arrives, how do you spend your gold? Who makes change for a gold bar? Barring the end of the world, small bars can command steep premiums over the spot price of gold due to manufacturing and handling costs and may not be the best way for individuals to own gold, peanut butter jars aside.

Gold coins are perhaps the easiest way for an individual to own gold. The South African Kruger rand is the best known coin and it sparked the issuance of the Canadian Maple Leaf and Uncle Sam's American Eagle. Typically, the coins can be purchased at the market price of gold plus a fee to cover production and handling. The coins are also available through dealers, but remember that a dealer isn't a card-carrying member of the National Endowment for the Arts and the profit on the sale comes out of your pocket.

"I can't recommend buying ten to 15 gold coins and paying a premium," Nadler says.

Rare gold coins are a bet on their uniqueness – not the gold. Such coins are duck soup for collectors, but not the investor looking for a hedge against inflation because another sunken boatload of the coins may be discovered in the future, driving down the coin's value as a collectible.

Silver has done well recently, but unlike gold it's not a reserve asset held by central banks. Silver is an industrial metal and doesn't offer gold's store of value. For most newbies, playing the commodity market is an invitation to a beheading – yours.

Finally, remember that when you invest in gold, the precious metal just sits there. It may tie up money that could be better invested in stocks, stashed in T-bills or a CD, or even spent on a dream vacation. So if you buy gold, know what you're getting into and define your goals.

The best reason to own gold is to protect your assets in an economic downturn. Dreams of a quick kill or end-of-the-world fears are just twaddle.

Still, gold outperformed stocks during the stagflation of the 1970s.

"In the late 1970s and early 1980s, stocks were about like playing poker," says Lewis. "Back then, only suckers put their money in stocks."
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