Stocks started the year badly, while gold has gained a bit of luster, rising more than 5 percent as of Jan. 28. Some experts are now predicting that financial markets will plunge deeply for the third time since 2000 and that gold could provide a safe haven.
With gold having dropped from just over $1,917 an ounce in August 2011 to just over $1,118 as of the end of January, is it time to consider buying some? Here’s my take.
Conventional wisdom regards gold as a great diversifier, as well as a safe haven in times of geopolitical turmoil and when governments are printing money at especially fast rates — often viewed as certain to devalue paper currency relative to gold. Quite frankly, that’s why it was so hot years ago, when I fell for a prediction that gold would rise to $3,500 an ounce within two years. That prediction, by the way, was made in 1980, and pretty much for the same reasons that lofty gold predictions were being made in 2010 and 2011.
Will there be more global turmoil? Though I can’t say with certainty, I doubt it would have much of an impact on the price of gold. Let’s look back at what has happened in the world since gold peaked in 2011. I would argue it has been the perfect storm of exactly what goldbugs want, which is more geopolitical unrest and lax monetary policy. ISIS has emerged, making al-Qaida look almost small-time by comparison. The Middle East is in turmoil, North Korea is testing nuclear bombs, terrorism is rampant — both the physical and cyber varieties — and, around the world, deficits remain high as global debt surges. But instead of gold going from $1,917 to $3,500 and beyond, it has plunged by more than 40 percent.
I’m going to leave the world of theory now and talk about an expensive lesson I learned. Back around 1980, I took most of the college graduation money I received and bought gold after a pullback to roughly $664 an ounce. I was sure the price would soon double and give me bragging rights for decades to come. In reality, my investment hasn’t even kept up with inflation. Not such a genius after all.
If you’re considering gold, buy it for the right reasons and don’t move in and out. The wrong reason to buy gold is watching a compelling TV infomercial or thinking you have a clue how it will perform over the next year or two. An even worse reason is expecting it will make you rich, which was my reason for buying it about 35 years ago, when I thought I was a lot smarter than I was.
A better reason to buy this precious metal would be to act as a diversifier to stocks and bonds. Gold often — but not always — zigs when financial markets zag. Gold didn’t keep up with inflation for me (since I bought relatively high at the time), but over even longer periods, there is some evidence that it has. If you buy gold, do it sparingly, meaning no more than 5 percent of your portfolio. And do it for the long term or don’t do it at all.
Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.