All That Glitters May Not Be So Golden

Oct. 30, 2007 8:32 AM ETGLD, GDX2 Comments
Brad Zigler profile picture
Brad Zigler

Debate has raged for some time now about the utility of gold in a portfolio.Forget, for a moment, the breathless claims of infomercial touts and Parade magazine advertisers. Think, instead, of asset class selection.

Why should anyone add gold—or, for that matter, any asset—to a portfolio? The answer that comes immediately to many people's minds is "return." It's the promise of outsized, and often outlandish, returns that entices people to call that 800 number in the wee hours of the morning to get their hands on the yellow metal.

There's no doubt about gold's current price jag. Gold for spot delivery is now $786 per ounce, a five-year high. Back in the market-bottoming days of 2002, you could have picked up the metal for as little as $308. Gold has risen more than 152 percent in the past five years, producing a compound annual return of about 20 percent.

Not bad. Especially when you consider the contemporaneous return for stocks, as measured by the S&P 500 Index, has been only 12 percent per year. Are these guys with the mile-a-minute pitch really on to something?

Well, that depends upon your views on inertia. We can plainly see the return generated by gold in the past, but what can we expect of gold in the future?

Gold becomes most appealing to investors in times of uncertainty. In the late '70s, inflation ran rampant, oil prices spiked and currencies spiraled downward. Gold, just unfettered, sought its level, eventually peaking at $850. We're again in uncertain times. Stock market wobbles, a weakened dollar, soaring fuel prices and jawboning about inflation have all contributed, according to some analysts, to gold's recent appreciation - better than 30 percent in the past 12 months alone.

Gold isn't the end-all, be-all, however. In the

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Brad Zigler profile picture
Brad Zigler's stints as a contributing editor for the Corporate Communications Broadcast Network, the Journal of Indexes, and CRB Trader set the stage for his role as managing editor of Hard Assets Investor and later as alternative investments editor of Wealth Management (formerly Registered Rep.) magazine, the most highly subscribed publication for financial advisors. Brad's feature articles have appeared in Registered Rep./Wealth Management, Mutual Funds, Financial Planning, Financial Advisor, Futures and Ticker magazines, TheStreet.Com and MarketWatch Web sites, and in journals published by Institutional Investor. After heading up marketing, research and education at the Pacific Exchange's (now NYSE Arca's) option marketplace and Barclays Global Investors, Brad became a financial correspondent for the European Press Network, and a Public Broadcasting System/National Public Radio affiliate. He continues his work as a financial research and communications consultant for a number of private and public organizations.

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