What History Says About Gold Investment

Source: Daily Camera, Dave Gardner (1/31/11)

"Those who think gold will only increase do not have history on their side."

With some investment managers recommending that two-thirds of your assets be in gold, is it a good idea for your portfolio? It may have a role, but before putting a significant part of your wealth in gold you should consider these points.

Gold's going up, but for how long? Over the past few years, gold has appreciated at an impressive rate. When we look back on this period, the question is whether it is useful for projected future returns, or an anomaly.

Gold is more than a creator of wealth. While gold does not move in lockstep with inflation, over prolonged periods there is a strong parallel. One example is the gold-suit rule of thumb. The idea is that over the last hundred years or more, one ounce of gold was enough to purchase a high quality men's suit.

At more than $1,300 today, this would be a top-notch suit, but it's close enough to support this theory. In 1900, an ounce of gold valued at $20 would be enough for a nice suit.

Gold prices are volatile and can deviate from inflation in short periods. The speed of the crash in 1980 and other times should be warning to those that think they can get out of a falling gold market if it comes.

Gold demonstrates "bubbly" characteristics. Google "gold newsletter" and you'll find that gold investment has gone viral, with scores of experts willing to take your money for their timing prognostications. When an investment technique becomes universally acknowledged as a sure winner, it's usually a sign that we are closer to the top of that market than the bottom.

Is gold ready for a fall? It's hard to say. Just remember those who think gold will only increase do not have history on their side.

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