Savings & Investment, Smart Spending

As Gold Prices Drop, Investors Are Scared Away

Gold has long been a popular investment.  Even before days of modern investing, it had a certain intrinsic value.  Now, many people love it for its resistance to bear markets, and it is a great hedge against inflation.  Some investors choose to hold physical gold in order to have something of value in the event of a total economic collapse.  When the market was tumultuous a few years ago, investors flocked to gold.  The price of gold, subsequently, skyrocketed from around $400 per ounce in the middle of 2005 to nearly $1,900 per ounce in the middle of 2011.  But now that the market has calmed and the economy is getting back on track, what are investors doing?

Many investors are emotional rather than rational.  As the market dropped a few years ago, they got nervous. And as it approached the bottom, they pulled their investments taking huge losses. During this time gold was rapidly rising in value, and the same investors that just took a few losses on their other investments bought into gold at an already run-up price.  Since gold does best in times of high inflation or bear markets, gold has begun its decline in value. The same investors that rushed to get in are now dumping their gold holdings and returning to the market. This buy high, sell low pattern is a sure fire way to go broke in no time.

Gold jumped up to $1,890 per ounce in 2011.  Since that time it has bounced around in reaction to news stories about the situation of the economy.  As of the middle of February 2013, the price of gold was under $1,600 per ounce.  The reason:  because investors are bearish on gold futures. They see the economy improving and other areas of the market doing better than gold

While physically gold has its own value, a good deal of the price is controlled by investor sentiment.  When people think other investments are going to do poorly, they buy gold.  This drives the price up to those seen in the past few years.  But when other investments are doing well, investors will sell the gold and buy other stocks.  This will drive the price back down.

Many advisors and analysts agree that the price of gold is still too high.  There was no reason that it should have skyrocketed to the highs that it hit. And the only reason it did was that investors saw the price going up and wanted to cash in on the run.  But now that the price is coming back down, they are cashing out and the price is dropping even further.

Gold is an essential part of any portfolio.  And just like any investment, if you are good at reading the market you can speculate gold and make a decent profit.  For most people though, they will be best served by keeping between 2% and 5% of their portfolio in gold.  This will help keep the portfolio well diversified, and a well diversified portfolio is a good portfolio.