It's been a roller-coaster year for the markets, sending many investors into the arms of a seemingly safe haven: gold. This hot commodity now gets regular media coverage as it continues to outperform with record highs. But, what goes up must come down, begging the question: what should you do about gold now? (For related reading, also check out 8 Reasons To Own Gold.)
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Below are a few tips from market experts on things to look for when deciding whether you should stay in the gold game or take the money and run.
While you may have just tuned into the media hype surrounding gold in the last several months, it's nothing new. The summer brought stock market rallies and losses, and fear began to spread about the future of major currencies like the euro, due to debt concerns in Greece and other parts of the European Union.
Cash used to be a safe haven, but gold has become the new hedge against a falling dollar. Market fears like the issues mentioned above tend to send investors straight into the arms of gold; it's the one thing that will hold a steady value in the face of eroding currency brought on by government and banking instability. Because of its tendency to move independently of the market, having gold in your portfolio can oftentimes offset volatility in other investments, like stocks. This literal "gold rush", in addition to demand from emerging markets, has sent the value of gold soaring more than 20% this year.
But there are no investing guarantees, and in that sense, gold is no different. It can be volatile. A wise strategy is to make sure that you hold no more than 5% of gold in your overall portfolio. And now that it's literally become "the golden child", it's even wiser to wonder when to back out of the game. The general rule of investing, after all, is to look for undervalued asset classes. On the contrary, gold could be reaching its peak price.
When gold hit $1,000 an ounce several months ago, speculation that the peak was upon us began. In October, gold has risen above $1,300 an ounce. Now some analysts believe it could even hit as high $1,600 an ounce.
The Future for Gold
Citigroup recently revised its short- and medium-term gold forecast to $1,450 per ounce, pointing to safe haven demand for gold in light of ongoing concerns over global currency and deflation. However, analysts went on to say that they have "less conviction for sharper moves one year from now". Likewise, Natixis, a French investment bank, predicts that the gold price will slowly fall in 2011 as the global economic recovery continues. Accordingly, it predicted the gold price will average $1,050 in 2011.
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Unlike many investments, gold is tangible, costs money to store and pays zero interest. In an interest rate environment like our current one, when real rates are at or near record-lows, gold prices tend to be inversely related to real interest rates. This means that when rates begin to creep back up, the price of gold will likely start coming down, as investors move to higher interest paying investments. However, if the higher rates are caused by inflation, gold prices will typically increase as investors use gold as a hedge.
The Bottom Line
As with all investments, there are risks and rewards, and gold is no exception. While no one really knows when gold will peak, the consensus for now indicates that it may not be in the too-distant future. Knowing the factors that play a role in its price movement, and staying aware of the key happenings, can prepare you to make timely and informed decisions with your gold investments. (For more on gold, see Is Gold A Safe Investment?)
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