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Golden Rule: Buy What you Know…not Gold!

Updated on October 14, 2010

“Should we be buying some gold now?” I only wish that I had a dollar for each time I answered this question over the last month or so. I certainly don’t want to minimize the fact that gold has been on a tear and I’m sure tons of folks have made money. My remarks and observations are that people are paying attention to it because it’s being talked about and it’s already up. None of my clients have been exposed to gold as a strict percentage of their allocation but our “trains are still running on time”. We may own some positions in companies that mine or process gold but I do not own the commodity outright.

My answer to this question is “No…. we should not be buying gold now.” Perhaps I need to temper my answers and perhaps polish them up a bit! Gold used to be thought of as a hedge instrument. That’s the way I was introduced to it and in all of my studies I still understand it to be a commodity. Commodity prices are driven by pure supply and demand. Where folks get a perceived notion that buying it will be safer for their portfolio is what puzzles me. It could blow up just as quickly as a penny stock and quite frankly, gold has not been the consistent performer over time that one might assume. Historically it actually lags the stock market but recently it’s an alluring evening headline on any news outlet.

 

Gold has defied the odds as of late and a number of factors are driving it to even frothier all-time highs. As of today gold was trading at $1,376 an ounce. I believe this story is much more about a weakening dollar than it is strength in gold. The dollar continues to feel pressure and this has buoyed stocks as well as most commodities.

 

Naturally, this is why the questions come in. Do people really want gold for stability and a safe haven as it was once perceived? Or are they chasing performance and being lured by north of 25% returns this year? I suspect it’s the latter and with that said it has all the makings of the next train wreck. If you’re already in gold be prepared to protect your gains and don’t ride a correction or pullback out….it could be sharp and surprise most with how quickly it sells off. For now the dollar appears to still have more downside and that could push the gold frenzy even further which only hooks in the last few suckers. C’mon folks….I hear at least two to three gold advertisements a day….People should be smart enough, or at least skeptical enough, to recognize this trend emerging.

 

Before we talk more about any upcoming bond bubble….let’s prepare for the gold bubble bursting. It will happen and once it does you’ll want to know about owning GLL (ProShares UltraShort Gold). This ETF seeks to replicate twice the inverse daily performance of gold bullion. It’s getting the snot beat out of it now as gold shines, but its time will come and it will reverse sharply.

 

Lastly, as tempted as you may be to buy gold, do you really know what it is as an investment? How has it performed over the long-term? Are you looking for an investment that is far more volatile than stocks yet has underperformed them for the past 30 years?

 

Owning something like GLD, an ETF (Exchange Traded Fund) that tracks the price of gold is fine for maybe 2-3% of your portfolio. Even at that percentage I would rather buy something I know, or better yet…, something that your portfolio actually needs.

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