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Question Of The Month – June, 2008 Load Up On Gold? We didn’t hear or read much about buying gold during the past 20 years or so but at the end of 2007 and going into 2008, we heard a lot about gold. You saw the ads on TV, the newspapers, financial magazines --- ―Gold has increased 180% and it can go much higher‖ ---―There may never be a better opportunity for you to hold gold‖ --- Gold, the smart choice for today’s investor.‖ ―Gold is hot.‖ Tim Grant, a columnist for the Pittsburgh Post-Gazette, states ―Although gold is no longer used as currency in modern society, it is an enduring form of money that people still rely on as a way to hold their wealth and diversify their portfolios when they become nervous about assets such as stocks and bonds.‖ But, should you rush out to buy some or start digging? Hold off while we take a look at a bit of history. The last time gold prices went up was when it sold for a record high price of $850 in January 1980. However, prices fell during the 80s and 90s –dropping to $264 an ounce in 2000. In April, 2001, the price of gold hit a low of $255.95 an ounce. It reached a record high of $1,030.80 on March 17, 2008. On May 6, it was selling for $914. . Let’s look at the historical price of gold ---- 1970: $39, 1975: $199, 1980: $850, 1985: $364, 1990: $455, 1995: $422, 2000: $316, 2005: $540, 12/31/2007: $914. It moves around quite a bit, doesn’t it? Is gold a good long-term investment? Look at the history. Speculators who bought gold at its peak in 1980 and then sold at a low during 2000 lost 70% of their investment. During that same period, the Dow went up 1,113 percent%. A good number of experts will tell us that Should you buy gold at the current price of more than $900 an ounce? The answer could be ―yes‖ if you think it the price is going higher. A good number of experts will tell you that when an asset is selling at a record high, it is always the time to sell, not buy. William Grover, who teaches at Bucknell University, states that according to the concept of ―regression to the mean‖ everything has an average over time and over time that’s where the price will go. ―The long term tendency of the price will be to go to that average.‖ The experts will tell you that the price is driven higher by the demand --- ---―There may never be a better opportunity for you to hold gold‖. The problem, according to Money magazine (2/2008) with gold is that ―the metal’s long-term record is more tarnished than a cheap bracelet. It’s taken more than 27 years for gold to surpass its old $80 high. If the price had merely kept up with inflation, gold would fetch more than $2,000 an ounce.‖ Kiplinger Personal Finance magazine (6/2008), states that ―Gold is seen as a hedge against inflation and political turmoil. but it has little use beyond jewelry. Supply and demand are remarkably steady, so sentiment is the prime mover of price.‖ Matt Krantz, in his column, ―Gold glitters but it’s a bust as an investment‖ analyzed the price of gold from 1933 and concluded that it generated an annual price appreciation of 4.7% a year on average. Professor Jeremy Siegel, (Wharton School, University of Pennsylvania, states ―That return pales next to the 11`.8% average annual return of stocks, measured by the Standard & Poor’s 500.‖ USA Today financial columnist John Waggoner states, ―The big problem with gold and gold funds is that they can be insanely volatile. If you make a big bet on gold, be prepared to take a big loss. You really shouldn't keep more than 5% of your portfolio in gold, and you should rebalance regularly. If your holdings grow to 10%, sell enough to get back to 5%. If they shrink to 2%, buy enough to fill your holdings to 5%. You'll be selling high and buying low — and that, at least, will help you keep some of the gold you gain.‖ Professor of Finance Jeremy Siegel (Wharton School, University of Pennsylvania) reminds us once again that over time, the total return on stocks has exceeded that of any other class of asset. In his research, Professor Siegel looked at the total returns to stocks, long- and short-term government bonds, gold, and commodities (measured by the consumer price index). He states that ―One dollar invested in stocks in 1802 would have grown to $1,250,000 in 1991, in bonds to $6,920, in Treasury bills to $2,830, and in gold to $14.20. The consumer price index has risen by a factor of 10.4, almost all of it after World War II. One dollar invested in 1802 would have grown, in inflation- adjusted dollars, to $109,000 in stocks, $605 in bonds, $248 in Treasury bills, and $1.24 in gold.‖ Now, how about those ads on TV, the newspapers, financial magazines --- ―Gold has increased 180% and it can go much higher‖ ---―There may never be a better opportunity for you to hold gold‖ --- Gold, the smart choice for today’s investor.‖ ―Gold is hot.‖ Are you willing to buy some at $914 an ounce – the price it was selling for on May 6? Count me out. Call me a wimp.
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