Gold Investing Myths: What Gold's Critics Don't Get

December 2nd, 2014
in gold

Money Morning Article of the Week

by Jim Bach

Gold Investing Myths: Gold prices have fallen for the better part of two years, but that doesn't mean that its detractors have somehow been vindicated.

Gold has often been chided by some who have mischaracterized the allure.

Follow up:

It's often looked at as an investment that gullible, panic-stricken investors flock to when talking heads and infomercials warn that the United States is on the brink of a Weimar-style episode of hyperinflation.

And if we look back at 2013, when gold prices really began this protracted descent, gold's critics took the opportunity to gloat. Business Insider ran the headline "The Gold Collapse Is Great News," just as the yellow metal was dipping below $1,500 an ounce.

"There's a lot of glee over this news," wrote BI's Joe Weisenthal:

"Why should the decline of a relatively irrelevant commodity creating [sic] such a reaction? There's two reasons for this: [1.] Gold bugs are frequently jerks. [2.] This vindicates the economic ideas of the economic elites."

True, gold - like any investment - can be talked up by scammers who look to trap gullible investors.

But Weisenthal missed the mark when trying to malign gold investors. It is not purely mistrust in central bankers that drives people to gold.

In the right allocations gold is an important part of a healthy portfolio. It can hedge against market crisis and provide returns when other assets underperform.

Here four myths gold's critics harp on - and how they get it wrong.

Gold Investing Myth No. 1: Gold is the only investment you need.

Unlike what gold detractors will tell you, not all gold bulls think the yellow metal is the best and only investment to make.

For example, we're fans of gold at Money Morning. But we're bigger fans of stocks. Especially when underlying those stocks is a company with a fortress-like balance sheet and a globally recognized brand name delivering real needs.

"I am not suggesting that you invest exclusively in gold," Money Morning Chief Investment Strategist Keith Fitz-Gerald said:

"Stocks have clearly outperformed gold over the last 125 years. But I am suggesting you buy it as part of an intelligently planned investment strategy."

The bulk of your portfolio should be dedicated to stocks. But even the well-run companies run into trouble when the broader markets fall.

And that's where gold comes in.

Fitz-Gerald said:

"Gold has been proven to be a great crisis hedge and one that is more perfectly correlated to interest rates, which are, in turn, driven by inflationary pressures and global risk"

Gold will be your insurance policy when red hot markets correct or even crash. As stocks languish, gold will be the resistant backstop in your portfolio.

Fitz-Gerald said the best way to hedge for volatility in the global markets is to invest $1 in gold, either in physical bullion or gold stocks, for every $10 of your capital invested in bonds.

With this allocation, you can take advantage of gold's gains on the market downdraft, and minimize losses as the market goes back up and gold loses its safe-haven value.

Gold Investing Myth No. 2: You have to hoard physical gold in your own safe.

You don't have to hoard gold on your property, whether it be in your safe, under your mattress, or buried in your backyard.

And while there's nothing wrong with holding physical gold bullion in a personal safe - or some of the other low-cost ways to store gold - there are many ways to expose your portfolio to the yellow metal without owning an ounce of the physical product.

The truth is gold can be treated much like a stock. You can buy shares in exchange-traded funds that track gold's movements if you don't want to own bars or coins

ETFs like the SPDR Gold Shares ETF (NYSE Arca: GLD) track gold's movements, allowing you to realize the gains without having to go through the cumbersome process of buying and storing gold bars.

Gold Investing Myth No. 3: Gold is a purely speculative investment.

No one investment can be considered pure speculation without looking at the investor's behavior.

Value investors like Benjamin Graham have thoroughly made clear the difference between a speculator and an investor. For a brief refresher, here's the difference: a speculator is only interested in buying and selling an asset for gains in the short-term. They aren't buying into a company because they believe in management nor did they do a thorough analysis of the balance sheet. They are trying to buy a stock at its trough and sell it at its peak.

An investor tries to build value over the long term. They believe in what they invest in, and stick with the company through good and bad times as they aim for long-term appreciation.

Gold is only speculative if the holder of the asset is going to speculate. Gold can be a very speculative investment, but it has long-term value as well.

We here at Money Morning aren't usually going to tell you to dive in to the speculator market. We like to hold gold for long-term appreciation. And it helps that, as a crisis hedge, it will produce gains even as our other long-term investments are getting beat up.

Gold Investing Myth No. 4: Buy, buy, buy, then sit and wait for the inevitable economic collapse.

Some may say gold bugs are "jerks," but these yellow metal fans are actually a lot more in-tune to the realities of the investing world.

You see, buying gold isn't an irrational reaction to economic collapse fears. It's part of a larger investment strategy. A smart portfolio will include gold not because an investor is paranoid and wholly untrusting of government, but because it provides another level of diversification that is all too important in an uncertain global economy.

Fitz-Gerald said:

"Many investors ask themselves if now is the time to buy gold. I think that's the wrong question. What they should be asking themselves is if they can afford not to buy it right now."

Owning gold requires a dedicated rebalancing. Fitz-Gerald recommends an annual 20-minute rebalancing.

That means, each year, make sure your gold-to-bond ratio is still 1-to-10, based on price fluctuations in those investments.

More in Gold: Money Morning recently detailed for our Members the importance of owning gold now - and delivered a two-part "cheat sheet" that outlines the right amount of gold for your portfolio. You can get that gold investing guide - for free - here.

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