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Ask Money

Is gold a good buy?

Chris Farrell May 17, 2010

Question: I am 42 years old and have been very successful in saving money. Our retirement and 529 plans are well stocked with stocks and bonds, and we have paid off our mortgage. I plan to buy a house to rent as an investment, and I also want to buy some gold.

It looks like I can buy American Buffalo coins from the USMint, but I can also buy them from other websites. The mint is more expensive, but seems more trustworthy. Can you give me some advice on exactly where I can reliably buy gold and silver coins online? If you have any advice on other alternative investments, I’d be curious to hear about those as well. Thanks. Grant, Grants Pass, OR

Answer: The price of gold is skyrocketing. Gold prices have been up for nine consecutive years, the longest winning streak since at least 1920, and reached a record $1,248.82 an ounce on May 12, according to Bloomberg.

A number of factors are behind the spectacular surge, most recently fears of aan accelerating decline in the Euro, the vast amounts of sovereign debt issued by depression-fighting governments in recent years especially in the European Union, the risk of future inflation following massive injections of money into the global economy by central banks, and fear of higher taxes among the global wealthy. Gold is a traditional hedge against chaos and inflation.

My concern is that the price run-up has gone on so long that it is showing all the earmarks of a classic bubble. That’s what George Soros, the legendary hedge fund investor, believes. “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment,” Soros said at the World Economic Forum’s annual meeting in Davos, Switzerland, last January. “The ultimate asset bubble is gold.”

Still, Soros has taken a big bet in the precious metal, a gamble that he’ll be able to get out before everyone else when the bubble bursts. Here is a good article on gold from Bloomberg BusinessWeek’s Ben Steverman:

That said, if you want to gamble in gold the simplest, safest, most efficient way is with an exchange-traded fund, such as iShares Comex Gold Trust (symbol IAU) and SPDR Gold Shares ETF (GLD). A number of mutual funds focus on owning the precious metal and the shares of mining companies, like the Van Eck International Investors Gold (INIVX). Another approach is taken by mutual funds like First Eagle Global (FESGX). A small percentage of the portfolio is invested in gold bullion. It acts like an insurance policy. When the equity markets go down, the price of gold should go up, cushioning the impact on the portfolio’s value.

As for buying the actual metal, you’re right to be wary. The Weekend Wall Street Journal had a disturbing article on investment scams in Fraud Alert. Here is the section on gold:

Scams in which a company offers to buy and store gold for investors–and to sell the material when it increases in value–are also increasing, says Judith Shaw, Maine’s securities administrator. The problem: “In many cases, the gold doesn’t exist,” she says.

The right way to invest: Go through a reputable, local gold dealer, Ms. Shaw says. If you don’t want to hold onto the bullion yourself, carefully evaluate the seller’s offer to store it for you. “Purchasing your precious metal from somebody who’s local is far and away better than doing it over the Internet,” she says. “Our message always is, ‘Please just call us first to check them out.’ “

I would take her advice and call your state securities office before doing business. You can also check out the U.S. Mint list of authorized dealers. Owning coins and bullion is expensive since the metal doesn’t pay a dividend and you have to pay the costs to store it.

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