Fool’s Gold

June 9th, 2014

An investment in gold or another precious metal can be alluring.

“This is a no brainer,” you say. “I mean gold is one of the safest investments of all time.”

It might make sense for you. But you need to ask the right questions. And do some research.

Let’s take a trip down memory lane. History can be instructive.

The year is 1980. The economy is in the crapper. The 1970s were a tough slog, economically speaking. The glory days of America feel like they are over. Families are hurting. Panicked about the U.S. economy and the future of the U.S. dollar, people invest in gold. They “conservatively” buy it at $682 per ounce. They are told it’s a smart move and history shows it has performed incredibly well over the preceding decade.

But within two years of 1980 the value of an ounce of gold fell to a mere $310. Yep. Less than HALF of what investors paid. Two decades later, by 2001, the market value was just $256. Investors had to wait until 2007 to just break even on the $682 they paid.

Gold Data

Data Source: Gold.org

The point illustrated here with gold also applies to other precious metals. Before you invest in any, consider the following:

  • TV, radio, and Internet ads are ADS. They are not giving you objective investment advice, even if you think it is coming from a trusted personality. They are trying to sell you something. Step back, be objective, and evaluate your own needs and investing priorities.
  • Don’t put your eggs in one basket. Any investment should be part of an overall strategy, which includes diversified assets such as stocks, bonds, real estate, etc.
  • How long can you wait to break even?
  • Consult an investing professional who can provide objective advice.
  • Consider the different ways you can invest in gold (or other metals): gold stocks (e.g. shares of a company that mines gold), funds, bullion, bullion coins, and collectible coins. Understand the different risks and benefits of each.
  • Make sure you’re dealing with a licensed broker and reputable dealer. FINRA, the Financial Industry Regulatory Authority, has a useful tool for that.
  • Consider additional costs, such as insurance or storage.
  • If you don’t take delivery of the metal yourself, make sure it actually exists. Federal and state regulators have taken action against a number of scam dealers, including one just recently against Gold Distributors Inc. Use an independent appraisal of the gold to make sure the seller’s price isn’t inflated.
  • If a sales pitch minimizes the risk or urges you to act immediately, it’s a red flag.
  • Always keep investing simple. Unnecessary complexity represents unnecessary risk.

Precious metal investments can be useful components of your portfolio. They can help you diversify and they can help hedge against inflation. Just play it smart.

More information about investment in metals can be found here.

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