Beware of the Glitter of Gold
by Charles B. Carlson, CFA
Dow Theory Forecasts

One investment that seems to be on everyone's mind these days is gold. I suppose that's not surprising. Gold generally is considered a "safe haven" during global strife, and there certainly is a lot to worry about these days on the world scene. Also, gold tends to be an alternative investment when the stock market is floundering, and that has been the case as well.

So should investors be loading up on gold right now? I tend to think not. Sure, over the years gold has had some pretty impressive rallies. However, most of these rallies have tended to be fairly short-lived.

The conventional wisdom with gold is that you should have at least 5% of your portfolio in gold assets as a way to diversify your portfolio. The problem is that, if you had stuck to this conventional wisdom, you would have been buying lots of gold during the '90s in order to maintain that 5% position. That's because gold was getting killed nearly every year while stocks were skyrocketing.

I have no problem holding a small portion of one's assets in precious metals. But I would not want that percentage to exceed 5%. Nor would I be quick to buy more gold on price declines.

One fundamental problem with gold is that it is a trader's investment, not an investor's investment. That means hot money chases gold, and that hot money can flee gold quickly once the stock market improves.

Bottom line: While all that glitters seems to be gold these days, don't get sucked in by its allure. If you want to buy gold, buy only a little, not a lot.

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