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Gold doesn't always glitter

By Shane Stewart

For the Deseret News

Published: Wednesday, Feb. 1 2012 12:36 p.m. MST

When I was 12 years old, a small piece of rock sat on top of our refrigerator, which was our family's “safe.” The rock was covered with gold flakes, and I was instructed not to touch it because it was very valuable. I was fascinated by this. I wondered what that piece of rock and the small flecks of gold could possibly do to be so valuable.

Being so young, I was not aware that gold hit an all-time high that year. It was valued at $615 per ounce, or $2,358 in today’s market. That rock stayed on our fridge for many more years, and we waited for the price to go higher. We waited, but the rock continued to "do" nothing.

Here’s a little history: In 1717, Sir Isaac Newton was the master of the United Kingdom mint and set the standard price for gold. The price stayed almost the same for hundreds of years. But in 1968, a new pricing system was developed to allow gold to fluctuate with supply and demand. With that change, gold reached an all-time high of $1,650 an ounce.

As a financial planner, I often get questions from nervous investors who are afraid they may be missing something by not getting into "the gold rush.” Gold as an investment does not glitter quite like you might think. And it’s helpful to understand what gold does not do.

Like the rock on our family’s fridge, gold doesn’t "do" anything. It has no intrinsic value. In fact, successful investor Warren Buffet recently addressed this topic. We have two types of investments, he explained. The first type has the ability to produce a return such as “rental properties, stocks or a farm.” And the second type of investment must rely on the “hope (that) somebody pays you more later on.” He referred to the latter as speculation.

So do I. I don’t see buying gold as an investment but rather speculation on an object. And with that speculation comes higher risk than traditional investments. Properly diversified stocks, bonds and mutual funds consisting of stocks and bonds usually have a much lower overall risk. You may say, “But wait, gold is way up and the stock market is so volatile.” You should have more concern about the historic volatility of gold!

If viewed as an investment, gold has consistently underperformed the stock market in any historical time frame. The only exceptions? A few brief spikes in 1980 and 2011. And even with these spikes, long-term historical performance of the stock market still significantly outperforms gold. Let me say, I’ve heard some scary stories. Some investors are so enamored with gold, they remove 401(k) money and other life savings and put it all in gold. Yes, this means buying “rocks” that, whether they sit in a vault or on a fridge, do nothing.

Of course, appropriate uses of gold in an investment portfolio exist. But ownership of gold or gold-related investments should be viewed as the icing on the cake, not the cake itself.

As investors, we should each use a combination of the basic fundamentals of personal finance: create an emergency fund, have a plan to eliminate debt, be appropriately insured and have a retirement investment fund before we explore owning gold. Then you can "buy" gold in many forms — ranging from having a gold watch melted down to investing in exchange-traded funds, gold trusts or mutual funds that invest in companies mining and processing gold.

Rest assured, no matter what the gold investment, it should always complement a sound financial strategy, not replace it.

Shane Stewart is a certified financial planner at Deseret Mutual. He welcomes your feedback. Or you’re welcome to suggest a topic. Please send your comments to editor@dmba.com.

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