Gold: A refuge or a risk?

Gold’s allure for investors has a long history of waxing and waning, said Jane Birnbaum in The New York Times. “At the moment, it holds a particular attraction, given Americans’ worries about inflation, the risks in the financial market, and the falling value of the dollar.” Indeed, the price of gold recently flirted with its all-time high of $850 an ounce. Though prices are steep, buying in has “never been easier.” Rather than hold entire bars of gold, today’s investors can buy gold certificates, digital ounces, and exchange-traded funds that track the price of gold. “There’s been a democratization of gold ownership and new ways to acquire it,” says Jon Nadler, a senior analyst for Montreal-based bullion dealer Kitco Inc.

Some experts believe gold prices still have room to run, said Aaron Pressman in BusinessWeek. When you adjust for inflation, the $850 record, set in 1980, translates to as much as $1,800 in today’s dollars—more than twice the current price. “Analysts and fund managers also point to supply and demand factors that are keeping them bullish on bullion.” In India and China, the market is driven by demand for gold jewelry from the “burgeoning consumer classes,” while mining companies are struggling with increased operating costs. Still, gold “could be a wild ride in the coming months.” It may lose its luster once the Federal Reserve stops its rate cuts and the dollar regains strength.

Despite gold’s reputation as a safe haven, it’s actually one of the most volatile investments around, said Walter Updegrave in CNNmoney.com. “Given its flightiness, I don’t think gold is a good choice for most people.” Most investors are tantalized by gold when prices swing high—exactly when you don’t want to buy. “I suppose you can make a case (although I’m not a big fan of it) for keeping, say, 5 percent to 10 percent of your portfolio in gold” as a hedge, precisely because it moves out of sync with stock prices. But that, of course, would require buying when gold prices are low and selling when they’re high, “which is emotionally difficult for most people to do.”

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