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Gold Glitters at Record Levels

|Includes:SPDR Gold Trust ETF (GLD)

Gold has been a store of wealth since the beginning of history.  Today that is recognized in Asia and Latin America (where money is flowing) but to a lesser degree in the US.

The price of gold has had an impressive rise over the last 35 years (after price supports were lifted), growing at a compounded annual growth rate of 6%.  But it's growth has been uneven as with all commodities.  The spike up in the early 1980s is exceptional, relating to a terrible recession along with high unemployment and high inflation rates.  After falling to the 300s it has risen to the 1350s today, shown below.

Gold prices:

1975___$160
1980____615
1985____368
1990____383
1995____383
2000____279
2005____444
2010___1290
Today__1344


In recent years the transfer of wealth geographically has fueled increasing demand for gold.  Asia, in particular, has a majority of the world's population with big population countries such as China and India.  Their wealthy investors, along with governments, invest in gold because it is viewed as a store of wealth, safe haven investment and for capital appreciation.  This transfer of wealth is an important factor for the rise in gold during this decade.

There are many ways to invest in gold besides buying commodity futures.  One simple way is to buy GLD, an ETF that tracks the price of gold.  There is no hassle associated with margin requirements or expiring monthly contracts.  The leading and oldest fund tracking gold is GLD.  Its growth in recent years has been outstanding especially through the financial crisis and the resulting recession.  Even though it does not pay dividends, few stocks can match this performance and even fewer are at record levels.

GLD:

Dec 30, 2005__$51
Dec 29, 2006___63
Dec 31, 2007___82
Dec 31, 2008___86
Dec 31, 2009__107
Oct 8, 2010 ___131


Another way to participate in rising gold prices is to purchase stock in major companies that mine and process gold.  While not replicating gold prices directly, these companies will prosper with rising gold prices.

I first heard about gold as investment many years ago, but didn't take it seriously.  At that time, it was based on investing 5-10% of a portfolio in gold primarily as a hedge.  That advice remains valid today, although aggressive gold bulls might raise the percentage after its price appreciation.  Growth of over 4 times in the last decade to new record levels is impressive when popular stock averages have not been profitable.  Dow is up a meager 3% and the S&P 500 is lower.

Because gold is a commodity there will be high volatility over the short term.  10% price swings need to be tolerated because they are common.  But long term investors will ride out these swings with the overriding thought that gold's value is growing (as with growth stocks).  Replicating 4 times growth in the last 10 years would take gold to $5400, difficult for most to fathom.  But annual increases of 5-10% is a more realistic expectation.  In addition, gold has high defensive qualities if inflation increases from massive annual government deficits.




Disclosure: Disclosure: no position

Stocks: GLD