If you like to have your investments close at hand — say, buried 12 paces northeast of the old apple tree — then gold bullion and gold rings is the kind of investment you’d like. But even if you’re not worried that the dollar will plunge, owning gold isn’t a bad idea. You could also search for history of the claddagh ring and that also is a good investment.
You hear many people pushing gold these days, citing our nation’s $12.4 trillion debt. Gold is the classic hedge against inflation. If the U.S. resorts to printing money to repay our debts, the value of paper dollars will fall, and gold prices will skyrocket.
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Of course, given that gold has soared to $1,132.60, a 348%, gain from its July 1999 low of $252.80 an ounce, gold is a pretty easy sale these days. But gold hasn’t skyrocketed because of out-of-control inflation, which has risen at a 2.53% annual pace since July 1999.
And inflation probably won’t rear its ugly head this year, either. True, the Federal Reserve has pumped trillions of dollars into the economy to keep it from depression, and unless it drains some of that money, inflation will be an issue later.
But not just yet. For persistent inflation, you also need a rip-roaring economy and low unemployment. In an overheated economy, prices rise as demand outstrips supply. Workers demand higher wages to keep up with prices — and they can get them, because unemployment is low, and employers have to bid for talent. Eventually, the combination of easy money, low unemployment and rising prices combine to create an inflationary spiral.
We’re missing two out of the three elements necessary for high inflation. That little something extra in your pay envelope is more likely to be a layoff notice than a raise: Unemployment was 9.7% in January. And demand is weaker than a cup of vending-machine coffee.
“We think we still have deflation,” says Frank Holmes, CEO of U.S. Global Investors. And, in fact, gold isn’t closely tied to inflation. In the 20 years from January 1981 through January 2001, gold fell 69%, while prices doubled.
Gold prices are closely tied to the value of the U.S. dollar on the currency exchanges, however. When the dollar falls, gold tends to rise, and vice-versa. The dollar has fallen 46% vs. the euro since 1999.
The dollar has been gaining strength since December but only because other currencies look so awful. Investors have been dumping euros because they’re worried about a default on Greek government bonds. They’re buying dollars, if only because the U.S. seems more stable in comparison.
Keeping 5% or so of your portfolio in gold isn’t a bad idea as a hedge against financial catastrophe. “It’s the ultimate downside protection for events we can’t forecast,” says Rachel Benepe, co-manager of First Eagle Gold fund.
Most gold mutual funds buy shares of gold-mining companies, which often soar when gold rises. Top-performing gold funds are in the chart.
If you want physical gold, consider 22-carat U.S. gold Eagle coins. You can also buy 24-carat Canadian Maple Leaf coins, which have the same amount of gold as Eagles, but not the other metals used to harden the coin. Toss an Eagle from a skyscraper, and you’ll still have a coin. Toss a Maple Leaf from a skyscraper, and you’ll have a gold pancake.
Coins also don’t have to be tested for weight and gold content, as gold bars sometimes do. “With a 100-ounce bar, there’s a greater chance someone has shaved a few ounces off it,” says David Beahm of Blanchard & Co., a New Orleans gold dealer.
Shop around. Prices can vary considerably from dealer to dealer. And don’t buy gold through the mail unless you’re 100% certain the dealer is legit.
Physical gold has to be stored somewhere. Most people are happy to put their gold in a safety deposit box. If you don’t trust banks, however, you have to figure out where to keep your gold, which can lead to guns, dogs and treasure maps.
If you don’t want to own physical gold, consider a gold exchange traded fund, such as iShares Comex Gold Trust (ticker: IAU).
Rising inflation or a falling dollar may be in the cards — but you have time before it happens. For most people, a modest investment in gold isn’t a bad idea. “By no means should you have the majority of your portfolio in gold,” Benepe says. “But you never know when you’ll need it until you need it.”
John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. His book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is [email protected]. Twitter: www.twitter.com/johnwaggoner.
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