Should You Consider Gold For Your Portfolio?

OCEAN CITY — The price of gold (and other precious metals) has risen sharply during the economic uncertainty of the past year, with a gain of more than 26% from July 2010 to July 2011. The price has fluctuated through August and into September, but remains historically high. No one can reliably predict if or when the price might change, either up or down.

While a direct investment in gold is typically not available through qualified retirement plans, it’s important to consider a number of factors if you’re thinking of investing in gold outside your plan. An investment professional can discuss the risks and reasons for buying gold with you, but here’s some information to get you started.

Gold can add diversification to your portfolio, since the price of gold may move in different directions from traditional assets, as illustrated in the chart to the right.1

Keep in mind that “physical” gold provides no income, dividends or interest payments, such as you might get from real estate investments, stocks or bonds. Any gains in gold come only from potential price increases. And since 1980, real estate investment trusts grew 12.3%, and U.S. stocks grew 11.4%. Gold increased in value by 3.2%.

Gold may serve as a hedge against higher inflation. Experts differ on how much and how quickly inflation might heat up in the months and years ahead.

In the short run, the value of gold may remain stable or rise in a time of crisis. For example, the events of the past three years — turmoil in the global economy and in political hotspots like the Middle East — led some investors to invest in gold. And the market price of gold has risen substantially over the last few years. (See the performance chart.)

Further increases or decreases in gold’s value may be affected by how much longer global economic and/or political turmoil continues. Those who invested early may have seen an increase in the value of their holdings, but to realize a gain, they will need to sell their gold.

This highlights the difference between investing in gold as a safe haven from a crisis and investing in gold with the intention of realizing a gain. Before you buy gold, understand why you are choosing that investment.

You can invest in gold in several ways including:

Gold bullion (bars) and coins: This involves buying from a dealer and paying for secure storage. Shipping bullion or coins and keeping them is a safe deposit box also adds a cost. If you keep gold on your premises, you would need to address the security of the gold and consider how it affects the safety of you and your family.

Exchange-Traded Funds (ETFs): Several ETFs buy and hold physical gold and thus provide a convenient way to invest in the metal. Instead of buying bars or coins, you buy shares of the fund. These are traded like stocks on various stock exchanges (which is why they are called exchange-traded funds).

Mutual funds: A “gold mutual fund” may be available in your retirement plan, either as a core investment or through a brokerage window (such as a self-directed brokerage account). Or you can invest in a gold mutual fund through an IRA or after-tax brokerage account. Mutual funds that offer gold exposure typically invest in the stocks of companies involved in gold mining and related services. Like any stock, these can be volatile.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)