Should I invest in Gold?

Lately, there have been tons of radio and television advertisements encouraging us to purchase gold. Is gold really a great hedge against inflation? Is there any truth to the commonly heard prediction that the price of gold will reach thousands of dollars in the near future? How accurate is advice from supposed financial pundits claiming that we should be purchasing gold coins or gold certificates?

Here is what we know. Based on data from the Austin Gold Information Network, the price of gold has increased thirty eight times between 1871 and 2009. We can compare this with inflation (CPI) and the performance of the S&P 500 index. Based on Professor Robert Shiller’s study, CPI increased seventeen times and S&P 500 (discounting reinvested dividends) has increased one hundred ninety five times. So yes, gold can be a good hedge against inflation but stocks are a better hedge in the long run. If you decide to invest in gold anyway, do not be disillusioned! Investing in gold also has its risks. In 1980, the price of gold was nominally roughly the same as now. Adjusting for inflation, people who invested in gold 29 years ago are actually losing money right now.

My advice would be not to purchase actual gold in the form of bullion, coins, or certificates. They are not liquid and can be a hassle to store securely. Furthermore, you are always running the risk of uninsured theft. The simplest way to invest in gold is to purchase Gold ETF. Like most investments, it works through a third party: you purchase shares and the fund company purchases gold bullion accordingly, storing it securely. You can sell those shares at any time. It is a very easily liquidated and secure investment. And you never need to worry about the logistics.

If you are still inclined to invest in Gold, definitely do not make it more than 5-10% of your portfolio. There are other ways to hedge against inflation: REITs, commodities, and other precious metals, for example. Remember, diversify!