Finance: Gold’s at an all-time high — buy, sell or wear it?

By Pete Alepra, senior vice president and financial advisor, RBC Wealth Management, Cedar Rapids

Gold continues to make headlines daily with its rollercoaster ride to new record highs. With all of the mixed information and “expert” opinions, it is easy to become confused when considering it as a possible investment.

Given the challenges the United States and other global economies face, it is possible to see yet higher gold and silver prices. While so many investments collapsed over the past two years, the price of gold has continued an upward climb during this same time frame.

But is it a good investment for your portfolio?

Of all the major asset classes - real estate, stocks, bonds and cash - gold has been one of the few standouts. In fact, after going nowhere for almost 20 years, gold has outperformed the other asset classes now for the past decade.

This summer gold rose nearly 20 percent, climbing more than 15 percent in August alone. In the same three weeks, the S&P 500 stock index fell about 12 percent.

More than fear is driving gold higher. The simple fact that it kept rising in an otherwise turbulent market is part of the metal's appeal.

Gold crossed $1,600 an ounce for the first time in mid-July. Three weeks later it was worth more than $1,700 an ounce.

Ten days later, it passed $1,800 an ounce. The price has come down since those dizzying days, closer to the $1,600 range, but it's still high.

What do these prices mean?

Gold is used in industrial products and mainstream consumer goods. With every new high, consumers will have to pay more for everything from engagement rings to crowns for their teeth.

Currencies all over the world are declining in value as countries cut interest rates to head off even deeper economic recessions, and the banking system struggles to deal with massive writedowns and illiquid assets. With few currencies holding up in value, gold is often considered a safe haven during these unsettling times.

And finally, most gold bugs have learned to pay attention to the powerful upswing in physical demand for gold starting in late August and running through the end of the year. The cause of this seasonal upswing is often perceived due to the wedding season in India, by far the world's largest importer of gold.

Canadian firm CIBC recently pointed out that gold has risen in the month of Sept. 16 of the last 20 years.

The other side of the gold trade

Although gold is considered a “crisis hedge,” it is also viewed as an inflation hedge. As of yet, government data overall has not reflected significant inflation.

Once the economy does catch gear, the Federal Reserve more than likely will pull money back out of the economy, with the goal of alleviating inflationary pressures. Gold prices likely will pull back if this happens.

Also, gold does not pay dividends or interest. It is an asset that you can own for extended periods of time and receive nothing in return.

Excluding the last decade, gold and gold-related stocks have been poor performers. Also, central banks hold huge amounts of gold bullion that they occasionally threaten to sell from time to time, which, of course, could weaken the price.

It is important that investors look at their portfolios

historically. Used correctly, gold and gold-related investments can be highly effective components of a properly diversified investment portfolio.

So the questions is, should you own gold?

Currently the gold trade is a very crowded space. Everyone is talking about it, everyone wants to own it, new gold investment products are being created on a daily basis to allow individuals to conveniently invest, multi-level marketing firms have been created to sell gold, and gold dealers across the globe have never been busier.

These things often indicate a market nearing a relative top, not a market bottom. (Remember the dot.com days or the “they aren't making any new land” days.)

Gold investments are starting to have the same feel as these other asset classes a few years back.

So the answer is ... it depends

Why are you buying it, what do you expect out of it?  Is it to hedge inflation, out of fear or speculation?

Do you have a strategy for selling it?

Again, do your homework to answer these questions honestly.

Identify the “real” purpose behind your decision before you take the plunge - in the market or at the altar.