The price of gold has been going up and up, so it's top of mind on all the business channels. With all the talk, it's probably a good time to go over what you really need to know about it.
Gold has been setting all-time record prices (before factoring in the effects of inflation), climbing almost 10 per cent in the last month alone. As of Sunday the price was over $1,600 (U.S.) per ounce.
We're bombarded by commercials on TV about jewellers who are dying to buy your gold. They suggest that since the price has run up so much, now is the time to sell. It's not a bad argument, because the rule about investing is "buy low, sell high." But the problem is that some of these companies ask you to mail your gold in, then wait for a cheque to be sent after they've appraised your pieces, and in some cases these gold buyers have been revealed to pay as little as 30 per cent of the market rate. So their "buy low, sell high" argument translates into "buy low, sell at a discount, don't make any money at all."
Never send your jewellery to a gold buyer by mail. But if you can't resist the temptation, take your pieces in personally.
If you're just owning gold in your portfolio, experts are polarized: Some love it, some hate it. Then there are those who love it sometimes and hate it at other times.
Proponents pound the table and urge investing in gold as protection against inflation or stock market calamity. Gold has historically increased in value in each of those scenarios. Opponents point out that gold is at best a very volatile store of value. The inflation-adjusted performance over longer terms is pretty dismal, but the rapid ascent we have seen from time to time has made lots of people money, too. There are experts on either side of the equation who put forward compelling arguments. So how do you play gold in your portfolio?
If we first consider that gold-exploring and gold-producing companies are already well represented in the Canadian stock market, then you likely already have gold exposure in your portfolio if you own a well diversified basket of domestic stocks, ETFs or mutual funds. If the price of gold changes, it affects the bottom lines of these companies, which affects their stock prices.
So the question is whether you want to make a specific bet on the price of gold.
Perhaps speculation is a better word. Note that speculation is not a bad word, it's just a different word. Gold just sits there. Its price is determined by the market, but it doesn't spit out dividends, or pay interest. It doesn't expand its work force, or hire a new CEO. To analyze gold means you have to know what all the companies in the world are planning to do with their gold consumption, whether it's for jewellery or in manufacturing applications. You also have to know how much speculation by other investors plays a part in the price - how many people are simply betting on the direction of the price.
For everyone who predicts gold will continue to glitter, there is someone who thinks it could turn into coal. If you don't have a firm opinion, don't worry. You're not alone.
Preet Banerjee, B.Sc, FMA, DMS, FCSI is a W Network Money Expert and blogs at wheredoesallmymoneygo.com. You can also follow him on twitter at @PreetBanerjee.