This post was written as part of a feature offering ideas from bloggers on ways to make more money in 2009. See all 18 suggestions.
Gold and the U.S. dollar are inexorably linked. The U.S. dollar represents the U.S. economy as a paper asset, while gold represents a standard of international value that transcends national boundaries. The value of both of these asset classes is very difficult to determine. Both are affected by geo-political events and both move up or down as a matter of perception.
Let's look at a few examples. With the large bank bailouts of 2008 and the coming Obama stimulus package, there are those who say that we are way overextended and have printed too much paper money. Those who take this position are the "gold bugs," the ones who are running away from paper assets to the safety of a hard asset like gold. This is where you find predictions that gold will rise to $2,000-$5,000 per ounce. It is this perception of the U.S. economy that drives investors to buy gold.
Then there are those who look at the world a bit differently. They see a world with 6 billion plus people that is running out of natural resources and that will not be able to meet the demand for basic commodities such as food, energy and raw materials. As a result of these shortages, commodity prices will rise to irrationally high levels. This in turn will cause rampant inflation and devalue paper assets even further and make gold even more valuable.
If you look at some websites that sell gold and silver coins and bullion, you will see a backlog of up to six weeks for delivery. Many investors have become disillusioned with paper assets and are hedging their portfolios with precious metals.
Now, if you want to invest in gold there are several ways to do it:
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You can buy physical gold in the form of coins or bars and hold it hoping for price appreciation.
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You can buy LEAPs on the CBOE. These are long-term options on gold holdings, such as the gold funds (NYSE: GLD) -- it is an exchange-traded fund, known as an ETF. These LEAPs go out up to three years into the future, so you can take a long-term position with less risk.
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You can venture into commodity markets and buy a gold futures contract, which usually has a three-month life span. This is the riskiest way to play the gold market. For example, let's say you bought a gold contract last week. Suddenly, you walk in Monday, January 5, 2009, and find that gold is down $25. Each $1.00 equals $100, so your investment is down $2,500. I would say that unless you have a strong stomach for risk and at least $500,000, you shouldn't even think of playing the futures market. Keep in mind that in three months you must liquidate your position -- win or lose -- or take delivery of 100 ounces of gold at whatever the price is when your contract expires. There are mini-gold contracts, but again you are entering a high-risk investment.
The problem with the future is that no one can predict it accurately. I would start with a small investment in gold and if circumstances and world events follow one of the scenarios mentioned above, I would keep adding to the position. The one big mistake many people make is to place all their money in one pile and then that pile turns to dust if they end up on the wrong side of the market. We've seen this in spades with the stock market this past year.
In the end, you must decide if gold is the right investment for you. The need to own gold and how much is often dependent on a person's view of "return on capital." Except for possible price appreciation, gold does not offer any "return on capital" and may not be suitable for everyone.
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