Bull run in Gold, or Fools Gold?

Typically investing in gold is referred to as a safe haven. It is touted as a way to protect your portfolio during volatile markets. Depending on how much television you watch, you may find it hard to view an entire show and not recall one or two commercials telling you that now is the time to buy gold, and exactly how easy and wonderful it is.

The United States adopted the gold standard in 1879 to be the hard asset that backed the greenback which was introduced during the Civil War. Although the standard was already being used in correlation with the greenback, it was not made official until 1900. Most people, especially Americans, believe that they were far ahead other countries in the decision to use gold as a way to back currency. Some will find it surprising to know, that it was actually the UK that used the gold standard before that of the United States. It was adopted in the United Kingdom in the beginning of the 1800’s, and by the end of the century many other European nations had also decided to use the gold standard.

Depending on how you feel about buying gold, traditional money managers will advise a dollar cost averaging approach to your gold position, regardless of what percentage you plan to make gold in your portfolio. You might have heard the phrase, “buy low, sell high,” but it is almost impossible to time the markets highs and and lows with complete certainty. This is where the term “dollar cost averaging” comes into play. It refers to how an investor would break down the amount of money they wanted to invest, into equal amounts. For this example, lets say you want to invest in gold, but in U.S. currency. There is $100,000 allocated in your portfolio that you plan to expose to the gold market. The thought is to break down the $100,000 into 5 equal parts. In this case, $20,000, you will invest at 5 different prices, making sure that the second price is lower than the first and so on. This gives you the peace of mind of knowing that if your first investment is made, and then 3 weeks later the price of gold has fallen, you can buy your second tranche of gold at a lower price. This makes your overall entry price lower. There are many different ways to determine where you would like your entry prices to be, and how to space them out. I personally like to use different SMA or simple moving averages, and other forms of resistant and support levels, but that will have to be the topic of another article.

As of May 16th, 2012, gold had dipped to a 2012 low as the news is filled with continuing stress with the Euro zone and the seemingly never ending problems with all that is Greek banking. Between 1983 and 2003 the price of gold traded between the mid 400’s and the low 200’s. During that 20 year period gold would have seemed like a fools investment, returning minimal gains during several volatile economic and stock market periods. But those that continued to hold between 2003 until recently would have reaped the benefits of nearly four times their original investment. This is assuming that your original investment was around $400 an ounce compared to Wednesdays close of 1536.20 per oz. in U.S. dollars.

With the continuing economic turmoil in Greece and with many European countries, the short term decision should be that of caution. With gold already testing the 2012 low, it would be prudent to give the trend in gold a little more time to give investors a better entry point. On a bullish note for the gold bugs out there, it was announced in a regulatory filing on May 15th, 2012, that the worlds largest exchange traded fund, that is backed by gold and ran by billionaire money manager John Paulson, has not reduced its stake in the precious metal as of the end of the first quarter.

Gold has been quite in vogue in recent years with its skyrocket price climb. During the past 10 years gold has had a tremendous return on investment. That being said, I would advise readers to tread lightly. All the excitement around gold could come to a halt, possibly leaving you holding the bag.