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Ask Money

Buying gold

Chris Farrell Sep 11, 2009

Question: What is the best way to add some gold to your investment portfolio? It is best to buy shares in a mutual fund, or just buy gold? Andrew, New York, NY

Answer: Gold has been on a tear lately. The price of the precious metal meandered for much of the summer, and then it moved sharply up in September. Gold futures closed at a record high today of $1,004.90 a troy ounce. (That’s a “nominal” price record; adjusted for inflation gold reached a peak of more than $2,200 in early 1980.) There are all kinds of theories being batted around the world’s largest chat room–the global capital markets–for the run up in gold. The most popular explanations revolve around the prospect of surging inflation in the U.S., worries about global deflation, buying by the Chinese central bank, falling mining production, a weak dollar–and all of the above.

If you’re optimistic about gold, I would be wary about buying the actual metal. The metal is volatile. Gold doesn’t pay dividends. It doesn’t create cash flow. It costs you to store it.

There are intriguing alternatives. There are some exchange traded funds (ETFs) that are a cost-effective option for the individual investor, such as the SPDR Gold Shares ETF. A number of mutual funds focus on owning the precious metal and mining company shares, like the Van Eck International Investors Gold. Another approach is shown by the mutual fund First Eagle Global. A small percentage of its portfolio is invested in gold bullion. It acts like an insurance policy. When the equity markets go down, the price of gold is supposed to go up, cushioning the impact on the portfolio’s value.

By the way, if your nervous about inflation here in the U.S. I still prefer Treasury bills and Treasury Inflation Protected Securities. These are investments that preserve capital and make you some money. No one will get rich with these securities, but the value of a dollar will be preserved. Still, if you want to invest a small percentage of your portfolio in gold, I’d investigate the mutual fund and ETF options at a website like Morningstar.com.

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