For years, and especially in 2008, all that glittered was gold…until now. After increasing more than 600% over about 10 years, the price of gold recently fell 28% from its high in 2011, leaving investors wondering if the gold rush is over or if it’s just on pause.
Wondering whether it’s the right time to buy? Consider the following factors first:
Safety. Investing in gold has generally been considered a safe haven, particularly during times of economic and political uncertainty. The terrorist attacks on September 11, 2001, and the financial crisis in 2008 helped reinforce that sentiment. In fact, gold was one of the few assets that gained value in 2008. When the value of the dollar weakens against other major currencies, the prices of commodities like gold generally move higher. So, given the slow economic recovery in the U.S., gold may still be a desirable investment for stability.
Central bank hoarding. The world’s central banks have been buying up gold to diversify their portfolios for years, pushing its value higher and higher. Now, some central banks — particularly in Europe — may be forced to sell their gold. This may lead to a further value drop in the short term and worsening market conditions in general, but could end up being a good bet for other investors who snatch up the newly available supply for protection.
Supply & demand. Despite the high demand for gold in recent years, supply has not substantially increased. Mining company production is struggling and could make any available supply more valuable in the long run.
On the flip side, some experts fear that the gold bubble has burst, and therefore shorter-term investors may want to get out now or avoid getting in before prices fall further. Additionally, the anti-inflation hedge that gold has often been used for is losing steam since there’s less fear of inflation in the foreseeable future.
Bottom line: Despite the current volatility, gold is still likely a sound investment for the long term — as long as it is part of a well-diversified portfolio — and it’s a relative bargain today. Since physical gold must be purchased from a mint, metal dealer or jeweler and involves storage and insurance costs among others, the easiest (and likely cheaper) way to add gold to your portfolio is to buy shares of a gold ETF.