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MONEY matters

Mark Zaifman's thoughts on money, global economic trends and politics

Is Gold Losing it's Luster?

Mark Zaifman   |    Wed, May 19, 2010 @ 06:15 PM

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As stock market volatility continues and the price for an ounce of gold continues to climb, many investors are jumping on the gold bandwagon. For socially responsible investors, the cost to the environment for mining gold is a price too high to pay.

Having a portion of your investment portfolio in precious metals such as gold has traditionally proven to be a good hedge against inflation as well as a hedge against a falling dollar. Most advisors recommend no more than a 5-10% total allocation to precious metals.

Since the economic meltdown, gold prices have been pushed astronomically high by sheer momentum-the velocity or movement of money away from or toward a desired investment. But price-when dictated by a fervor for an investment without much regard to its underlying history and without fundamental evidence supporting overly inflated highs-rarely lasts.

Here’s my concern and it’s similar to the concern I had when everyone and their brother were buying 2, 3 and 4 homes regardless of their income. It seems that everyone and their brother are buying gold. With the price appreciation gold has experienced over the past few years, it’s easy to be tempted into allocating a large portion of your investments to this yellow metal. But be cautious. Precious metals and gold specifically, is an extremely volatile asset class. Prices can drop and drop quickly. During tough economic times, investors are very susceptible to bogus claims that this is one of the safest investments you can make-it’s not.

If investing in gold or other precious metals is of interest to you, here are some possibilities to consider. Just please remember not to go overboard in terms of allocation and keep a long-term perspective in mind:

Vanguard Precious Metals and Mining Fund (VGPMX)

ishares COMEX Gold (IAU)

SPDR Gold (GLD)

If on the other hand, you believe the price of gold is headed downwards, you can purchase a mutual fund that takes a short position on gold:

Proshares UltraShort Gold (GLL)