Tuesday, December 18, 2007

Is Gold Still A Good Investment?

Gold should, in theory, be a great investment in today’s turbulent market. Historically, gold has been the investment of choice in times such as these, and for good reason. (For more information on some of these reasons see our article on Investing in Gold.) Why is it, then, that gold has recently been losing value? Has the value of gold peaked? Has the gold market changed? Can we still count on gold to retain its purchasing power as it has throughout history? Let's look at some professional opinions on the subject:

Dominic Frisby, the commodities commentator for MoneyWeek, said, “Unquestionably, you must own gold for the long-term--governments are continuing to inflate the money supply, and combined with the rocketing oil price, a return to the dark days of the 1970s is by no means out of the question.” Frisby also said that gold is just undergoing a correction and that over the long term, it would continue its rise. This correction was likely the result of profit taking, but the fundamentals supported further increases in price.

Michael Sesit, a contributor to Bloomberg, has a different view of gold. “One of the enduring dogmas of global finance holds that gold is a safe-haven asset. The precious metal is billed as a hedge against inflation, the ultimate insurance policy against geopolitical risk and protection during periods of financial-market turmoil.

With the credit crisis and the Federal Reserve's response to it--cutting the federal funds and discount rates and injecting huge sums into the banking system--the emphasis on gold's value has lately focused on market dislocations and inflation. Although with Iran and the Middle East, not to mention other hotspots, the specter of political risk is ever present.

Investors--and there are many of them--who buy into these suppositions might as well believe in the tooth fairy.” Sesit goes on in his commentary to give several reasons why gold is not a good investment.

Should we run and buy gold? Should we sell all our gold while the value is still high? If you are worried about the future of your currency or another depression, owning gold might be a wise move. If nothing else, having some physical gold on hand might help you sleep better at night. However, because gold doesn’t pay dividends--on the contrary it costs money to hold it--if you think the economy is going to improve and all this currency value talk is overblown, then gold might not be the investment for you. Either way, though, it might be a good idea to have a little gold in your portfolio. Just in case.

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