NOTE: This post is part of an ongoing education series. This information is for educational purposes only. This information does not constitute investment advice. No rational person would make investment decisions based on a blog post. Please consult with your financial advisor before taking any action. If you do need help with your investments contact us – Polaris Financial Planning. I have had a lot of people ask me about investing in gold, silver or other commodities. Gold in particular has gone from $513 an ounce at the end of 2005 to almost $1,500 as of today. This type of rapid increase (and lot of advertising) can get people real excited.
I am not a big fan of "investing" in commodities. Over the long run they do not give great returns. Don't get me wrong, I think that gold, like all commodities tend to go up over long periods of time time but it is nothing close to the returns of stocks. If you really want to put 5-10% of your money into something like this, I guess it would be fine but, why would you do it after the price jumped 200%? People can sometimes lose their reasoning skills when thinking about investments so I like to use real world examples for comparison.
Let's say you are in the store looking to buy some jeans. You find the perfect pair but they cost $100. You think that is a little high so you decide not to buy at this time. A year later you find yourself in the same store and see that the same pants are now $200 - so you buy them! Of course, most people would not but the jeans for $200 but, this is often how think about investing.
"It just went up a lot - I must buy it"
I would never try to guess if a given commodity (gold, silver, oil etc...) will go up, down or sideways during a given day, month or year. However, a rapid increase in price is often followed by a correction. I do not have any interest in the current down side potential in gold. Take a look at the graph below. The last big run up of gold was 1979 and 1980. Gold went from $200 to $600 an ounce. An increase of 200% in just 2 years. If you bought gold for $600 (or more) per ounce in 1980 you had to wait until 2006 to get your money back. 26 years just to break even - that is a very long time.
I love playing with graphs. Here is one that shows the performance of gold and The Dow from 1980 to 2010. Do you sill think gold is a good long term investment?