The price of gold: Investment vehicle appealing, yet risky

August 1, 2009

For thousands of years, gold has been viewed by many as the ultimate safe haven for investors, especially in times of economic distress. If these gut-wrenching times have you thinking about investing in gold as a guiding hand through the fiscal wilderness, you're not alone. Recent spikes in the price of gold reflect the usual emotional attachment to that commodity in times of economic gloom.

Key Points

Investing in gold is easy these days. The menu is heavily laden and readily available. You can buy the gold itself in the form of ingots or bars - at the time of this writing, about $982 per ounce - and take physical possession of the stuff or have others store it in your name.

If you prefer a more convenient method that avoids the need to physically store and probably insure the precious metal, you can buy gold futures or gold options, shares in gold mining companies, mutual funds or exchange traded funds (ETFs) that specialize in gold investments. If you like to spice things up with a bit of additional speculation, you can join the worldwide collectors of gold coins issued by many countries around the world.

Among the most popular gold bullion coins is South Africa's Krugerrand. The world's first gold bullion coin, the Krugerrand is minted primarily as an investment vehicle rather than legal tender.

Denominated in ounces rather than having a face value, the coins come in exactly 1 oz., 1/2 oz., 1/4 oz. or 1/10 oz. of 22 karat gold. Thus, their current value can easily be determined from the internationally quoted gold price.

There's a lot to be said for investing in gold in almost any form. Gold will not tarnish, deteriorate or lose its luster with age. The gold that is turned out by today's vast gold mining operations is exactly the same as the gold that was dug out of the ground thousands of years ago.

Gold never changes. Its broad appeal as an investment vehicle is underpinned by the almost insatiable appetite of the consumer market for gold jewelry and artifacts.

Keep in mind, however, that gold is no different than any other investment vehicle in one important way - it is not risk-free. While the precious metal itself may not change, its market price can and does bounce up and down, just as does the value of any other investment.

Consider the market price range of gold during the 10-year period from March 1999 to February 2009. During this relatively brief time span, the price of gold, based on New York closing prices, varied from a low of $252.80 in 1999 to a high of $1,002.88. While this was an unusually volatile period, it serves to remind us that even gold carries some risk as an investment.

Gold standard

For many years, the market price of gold was determined by a method known as the gold standard. During this time, the major currencies of the world were directly attached to the price of gold. In August of 1971, however, President Richard Nixon removed the U.S. dollar from the gold standard. That dramatic and controversial move left gold to find its own price on the free market. By 1980, gold had climbed to a record high, at that time, of $850 per ounce.

Alas, that didn't last for long. From that point, gold's price gradually declined to an all-time low, since the U.S. dollar had left the gold standard, of just under $253 per ounce in 1999.

Then came the turmoil of Sept. 11, 2001. Once the emotion of the tragedy began to subside, the market price began a gradual rise to a new all-time high, briefly hitting $1,023.50 on March 17, 2008, before closing at a lower level.

What's ahead?

It remains to be seen what will happen to the price of gold as a result of the current economic uncertainty. Just what effect, if any, the president's stimulus package will have on the price of the precious metal is impossible to predict.

The wild card in all of this is that many people don't actually value gold for what it is worth on the world's markets. For some, collecting rare gold coins has proven to be more lucrative than actually investing in gold and keeping up with market prices for the raw material.

Whether your interest in gold involves the possibility of investing in it directly or indirectly, gold is still subject to the ups and downs of modern market activity.

Thus, your investment will always carry some risk, no matter what form it takes. For an up-to-the-minute quote of today's market price for gold, log on to http://www.invest.gold.org/.

William Lynott is a former management consultant and corporate executive who writes about business and financial topics. Reach him at lynott@verizon.net
or at http://www.blynott.com/.