SEPTEMBER 14, 2010 | H FINANCIAL MANAGEMENT ARTICLES | ORIGINAL CONTENT BY GARRETT S. HOGE
According to legend, King Midas had a unique gift. Everything he touched turned to gold, bringing him immeasurable wealth and power. Life was good, until he touched his precious daughter and turned her into a gold statue. This caused him to mourn the loss of his daughter and turned his love of gold into hatred. The modern day (very loosely interpreted) moral to this story: "If you buy gold, don't buy too much, and be careful how you go about it."
Whenever the stock market takes a nose dive and the dollar drops in value, the conversation often turns to gold as an alternative and safe investment. It’s not so surprising given that the rewards for investing in stocks over the last 10 years have been minimal at best. The S&P 500 has actually lost 2.4% per year during the last decade. Alternatively, gold has risen from $255.30/oz. to $1,182.50/oz. (spot price as of July 19, 2010) during the same time period . The appeal for investing in gold is perfectly understandable given this data. Investors are looking for a flight to safety with their hard earned dollars… but investor beware. In "The Collapse Of The Dollar And How To Profit From It - Make A Fortune By Investing In Gold And Other Hard Assets", James Turk makes a case for investing all of your money in this way. However, even Turk warns that the business of selling gold is “rife with less than reputable souls”. Furthermore, if you buy gold now, you are buying it when the price is at an all-time high. I know the ads say that it may double in price very soon, but remember that there was similar sentiment for hightech stocks in 2000 and bank stocks in 2007.
The market for gold and other precious metals is not regulated by the U.S. securities industry. In some ways, you might say, it's like the Wild West during the gold rush days. This is not to say you shouldn't own some gold as part of your overall investment portfolio, but you should err on the side of caution when purchasing gold. We have helped a number of our clients make prudent investments into gold and other commodities, but we have done this as part of our overall client relationship and management. We are not a commission based advisory firm, thus allowing more objectivity in assisting our clients in making these purchases. We often suggest purchasing a modest allocation in gold or sometimes not at all- depending upon the client’s financial situation, goals, and risk tolerance.
Conservative talk show host Glenn Beck has found himself in the midst of a controversy as a result of his promotion of the purchase of collectible gold coins through Goldline, one of his primary sponsors (why a career in political commentary qualifies him as a gold investment adviser is beyond me). Representative Anthony Weiner, New York Democrat, alleges that Goldline intentionally persuades customers into buying “collectible” gold coins with <100% gold content for 100% gold prices. Weiner's claims could very well have their own bias and political underpinning since he doesn't seem to be overly concerned with other gold companies- just Goldline and Beck. Regardless, the controversy highlights some potential pitfalls in purchasing gold.
If you are interested in purchasing a gold position on your own, here are three ways that you might consider:
1. The purchase of U.S. Mint gold coins from the U.S. Mint or a dealer. This is perhaps the most direct way to buy and take possession of gold.
2. Buying a stake in a trusted company’s gold pool. The buyer does not take possession of the gold, but he owns a portion of gold equal to their investment in the pool. Gold pool account credit can be exchanged for physical gold for a small fee.
3. The investment in a gold exchange traded funds (ETF) similar to ticker: GLD. It is a pure play ETF where 100% of the investment of the ETF is in gold and the stock price moves directly with the spot metal price of gold. However, shares cannot be exchanged for physical gold.
Oftentimes, the doom and gloom crowd has a simple solution to all financial and economic problems. However, be skeptical of anyone who tells you to sell all your stock and buy gold and consult with an investment professional as to how this asset may or may not fit into your overall portfolio. In this way you can diversify and strengthen your portfolio and perhaps avoid making a big “King Midas” mistake.
Garrett S. Hoge, RFC, CFP®, MS of H Financial Management, is a private wealth manager based in Southpointe serving the ever-changing financial needs of his clients.
Please contact Garrett at H Financial Management, 400 Southpointe Blvd., #420, Canonsburg, PA 15317, Phone: 724-745-9406, Email: garrett@hfinancial.net, or via the Web: www.hfinancialmanagement.com.