As with any stock or commodity that gains popularity and garners the attention of mainstream media, experts are divided on the direction of gold for 2011 and beyond. One camp makes the argument that, given gold’s stellar rise, both in the short-term and over the past ten years, it’s too late to invest in gold bullion or ETFs. The other side insists that, given gold’s stellar rise, every man, woman and child should rush to invest in gold if they want to see any return on their portfolios. The first group believes that the price of the shiny metal has already run as far and fast as it should, while the second takes the view that the very conditions that caused the rise will sustain prices as long as the conditions remain.
As always, fierce contention will drive the cost of a troy ounce (because nothing can happen when everyone agrees), but what factors should individual investors consider when weighing sides in the bullion debate? Is it too late to invest in gold at current valuations? Or can a case be made for buying on valuation despite bullion’s apparent gains?
Historical Prices Support a Decision to Invest in Gold
Investment professionals who advise their clients not to invest in gold often point to its ten-year performance record, a return of around 400%. They make a case that sounds conservative and wise that the precious metal is simply overpriced. This argument, however, fails to take into account the historical behavior of bullion prices. In reality, gold has never come close to regaining its 1980 high of over $800 an ounce, which with adjustments for inflation translates to $2,000 and change in U.S. dollars today. That today’s prices might be cheap compared to historical valuations supports a decision to invest in gold.
Whatever the U.S. Dollar Does, Gold Does the Opposite
Historically, gold has tended to maintain an inverse relationship with the U.S. dollar over time. This means that a decline in the U.S. dollar in relation to other currencies will apply upward pressure to bullion prices. To invest in gold, buyers need some cause to believe that the dollar will continue to weaken. Due to the actions of the Federal Reserve to support the economy, growth in the money supply has had a dilutive effect, increasing the pressure on the U.S. currency. Added to this, record deficits at federal and state levels continue to depress the U.S. dollar and encourage money managers to invest in gold for institutional clients.
It’s Always Too Late to Invest in Gold or Whatever’s Working at the Moment
The two sides in the current gold rush debate form parts of larger groups in the investing world. One group takes the view that the higher prices go, the more risk that area presents to prospective investors. The other side believes that prices rise for good reasons, and that the conditions that caused the price elevation should continue to apply upward pressure. Some market gurus said it was too late to invest in gold in 2001 when gold was about to hit a triple. It was still too late in 2010 before gold rose another 20%. Now it’s really too late to invest in gold — at least for those who advised against it in 2001. In other words, anything that’s working will have its detractors, and their arguments always sound sane and sensible at the time. But "it can’t go any higher" isn’t an argument at all, and the history of every successful investment is littered with more naysayers than enthusiasts.
Individual investors can buy gold through precious metals funds, ETFs and the stocks of gold mining companies. Alternatively, gold bars can be stored for a small fee in secured locations at most local banks. Gold may provide some needed insulation against the devaluation of the U.S. dollar, which many expect to continue for several years or until the economy shows some sign of strength. To invest in gold requires conviction in an environment that remains hostile to anything that isn’t a bond. But those with the courage to stray from a well-worn path may find the fabled pot at the end.
Paula Wendland - Paula Wendland
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