Everyone seems to be chasing gold. Ads on radio and TV try to tempt you into buying bullion or mining stocks. Even local jewelry shops say to take advantage of historically high prices by trading your jewelry for cash.
The allure of gold, which has jumped from around $500 per ounce five years ago more than $1,800 today, reminds me of market darlings of yesteryear. Remember when everyone piled into dot-com stocks and drove them into bubble territory in the late 1990s? Most of those speculative Internet stocks crashed a few years later. Soon after that, people were jumping into real estate and home prices went through the roof. We all know how that turned out.
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Most booms and busts have the same pattern. People like to buy things when prices are high. Maybe they think they'll miss the chance to make a lot of money if they don't get in like everyone else. What people forget is prices can fall as fast as they rise. They're investing based on what's happened in the past instead of what's ahead.
With prices hitting all-time highs, this is not the time to be buying gold. The time to buy an investment is before its price rises, not after a big run. I'm not saying gold can't go higher from here, and I'm not saying to "short" gold. What I am saying is the risk/reward ratio is not favorable—I would rather miss out on the last part of an upward move than get caught in the stampede after a catastrophic decline.
If you are considering adding some gold to your investments now, don't run out and buy a gold mutual fund or exchange-traded fund. You most likely have enough exposure to gold through the funds you already own. Gold and other precious metals should be a small percentage—no more than 5 percent—of your investment plan.
There's a good chance that you have enough exposure to gold already; some funds you own buy companies with the highest earnings growth. The economics of a gold mining stock are simple: it costs companies a relatively fixed cost to get an ounce of gold out of the ground. As the price of the metal continues to hit new highs, gold companies are generating windfall profits.
Fund managers recognized this trend, and some have added gold and precious metal-related companies to their portfolios during the last few years. For instance, Michael Cuggino, manager of Permanent Portfolio (symbol PRPFX), invests directly in gold and silver.
Before you buy any gold, check your investment plan. To determine your exposure to gold in your funds, go to Morningstar.com. On a fund's page, click the "Portfolio" tab below the fund name, then "Holdings," and scroll down to view the top 25 holdings. There might be exposure beyond what's shown, but the top 25 holdings give you an idea of the range of the investments in the portfolio through the most recent reporting period. Also, a fund company's website may provide a list of top holdings.
If the manager of a diversified large company mutual fund has exposure to gold, it's probably only a small share of the fund's assets. That's because gold has not historically been a good investment. And now, with big price swings of up to $50 each trading day, gold is certainly not a safe investment.
Although the strong price gains look tempting, try to resist the luster of gold. You probably already have all you need.
Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast to coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC-registered investment adviser, which provides mutual fund and asset allocation recommendations, and research to stores in The Mutual Fund Store system.