Over the last five or six years we have fielded several questions about gold. Should gold be the place to invest due to our devalued U.S. dollar? If we experience another recession, is gold the investment to own? Should I own physical gold coins and store them in a safe?
It’s funny how these questions came about when gold was essentially at an all time high. We’ve had to talk clients down from the temptation of putting all (or a large portion) of their eggs in the gold basket.
GRANDMA WAS RIGHT
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There was a reason grandma said you shouldn’t put all your eggs in one basket. Those chickens worked hard for those eggs and one little stumble from Annie Sue would have sent all those eggs flying (right out of the basket). Somebody’s gonna sit in timeout!!!
There are two basic reasons why someone would want to load up on gold. Fear and Greed.
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FEAR
On one end of the spectrum is Fear. During the 2008 recession and after, people were fearful that we were in line for an economic meltdown of Armageddon proportions. They felt that the dollar would be significantly devalued and that somehow gold or gold coins were going to help them.
REALLY ????
Was our society really going to convert from a U.S. dollar denominated society to a gold standard? Did people really think that they would be able to use their gold coins to purchase goods and services? How silly!!!!
GREED
On the other spectrum is Greed. Gold hit a record high of around $1,900 per ounce in September 2011. You couldn’t go a minute or two without seeing a TV commercial on somebody wanting to buy your gold jewelry. The media mania was insane.
People didn’t want to miss the boat on this one. They wanted a piece of the action. And they got it, albeit at a record high price. By the way, this is very similar to the technology bubble of the late 90s and the most recent real estate bubble. Many people lost a lot of money during those times and I suspect that many will lose a lot of money as the gold bubble continues to burst.
DON’T FOLLOW YOUR HEART – IT’S BAD ADVICE
Isn’t it ironic that people buy more of an “investment” as it goes up in value, but when shopping at Target, Wal-Mart, Kmart, etc…, people typically buy more of something only if it goes down in value?
Why do people choose to buy high with their investments? Don’t they know the mantra of “buy low / sell high”? The reason they do this is fear and greed. You must resist the pull from these emotions.
GOLD IS NOT BAD
If you were one of the ones who bought into the mania and bought when gold was near an all time high, reality has likely set in for you by now. Since the high point, gold has declined 30% to $1,325 per ounce. And, I wouldn’t be surprised to see it decline a lot more.
I’m not saying that gold is a bad investment. I’m just saying don’t put all your eggs in that basket. Gold is intended to be a portion of your overall portfolio, not the whole thing. It should be combined with U.S. stocks, International stocks, real estate, U.S. bonds, International bonds, etc...
All of these investments are meant to strategically work together in order to minimize your risk. It’s kind of like putting your eggs in many different baskets. Now, little Annie Sue won’t get into any more trouble – at least when it comes to toting eggs.
Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™
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image used courtesy of Maura Teague