Monday, April 27, 2009

Investing in gold is not a solid idea

On Mondays, we answer questions from readers. If you have a question, post it in the comments section.

QUESTION: With the recent downturn in the stock market, I’m looking at investing in gold or other precious metals. What do you think of this strategy?

ANSWER: I always try to be diplomatic, but this is dumb, dumb, dumb. There are always a group of folks selling this stuff and they rise to new levels anytime a general panic occurs. The theory is that gold (or any of this stuff) has "intrinsic" value - that is, when the world goes to hell and people stop using paper money, you'll be able to swap your gold for groceries. C'mon. If our currency collapses, do you really think that the corner gas station or Wal-Mart is going to set up a "precious metals desk" at the check-up lane?

Even with the recent run-up in prices, gold has been a poor long-term investment. The price per ounce can (and has) stagnated for decades at a time. I guess it's okay to note that prices jumped hundreds of percent in short order, but it's also important to realize that they sat silent for years before that. In my opinion, this is a classic case of opportunistic marketing. Economic things look rough, so we'll scare people into buying gold.

At best, gold or other precious metals - even other commodities - could be a tiny part of a diversified investment portfolio. There are times when price increases in hard assets might - I said might - offset losses in other securities. But larger stakes in something as emotional as gold are really just a gambler's bet. And the people selling it are making an emotional appeal at your most vulnerable moment. Stick to mainstream investments and your opportunities for long-term success increase.

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