David Kuo: Gold may glitter – but is it overpriced?

Investment Insider

The price of an ounce of gold is heading back towards its all-time high in June of $1,260.

The dramatic 8 per cent rise in August came amid news that the US economy was showing signs of stuttering. Logic would suggest that the Federal Reserve might pump more dollars into the US economy.

Investors with one eye on inflation are right to be concerned. A flood of cheap money could be a precursor to deep inflation in the US, which could infect other economies. Consequently, it is understandable that they are looking to invest in assets that have proven to hold their value over time. Gold appears to fit the bill perfectly. It is easily stored; it is readily available and it can sit comfortably within any well-balanced investment portfolio. However, there is a problem. It may also be overpriced.

Fans of gold argue that it may still be off its peak. In 1980 it reached a high of $850 an ounce. After inflation, the price of gold could be $2,500 an ounce today. However, the risk of pricing assets from one peak to another is the deep troughs in between when a non-productive asset such as gold will do absolutely nothing.

However, gold investors say that because the cost of holding it is almost zero, it is irrelevant that it is a non-producing asset. After all, if savings accounts are paying next to nothing, then it would be better to invest in gold that has at least a chance of appreciating in value. However, it would be dangerous to ignore two assets that also have good records of beating inflation. They are dividend-yielding shares and rent-producing properties.

Another argument that is often put forward for gold is that it is a limited resource. It is maleable, conductive and inert, a combination that has many uses in industry. When demand increases, the only direction for gold prices must be up. However, it is important to remember some valuable lessons from another limited resource – land. Just because a resource is limited does not mean it cannot be overvalued.

A balanced investment portfolio should include a mixture of shares, property, bonds, cash and commodities (including gold). The easiest way to invest in commodities is through exchange traded funds. ETF Securities Physical Gold is a low-cost way to track the price of gold. Similarly, ETF Securities Physical Silver will track the silver market and ETF Securities DJ STOXX Basic Resources tracks metals mining and processing shares.

However, it is also important to rebalance your investment portfolio now and again. So if you have made healthy profits from gold, now looks like being a good time to lock in some gains. Arguments about whether there is a gold bubble will continue until the bubble eventually bursts. But no one ever went broke taking a profit.

David Kuo is a director of financial advice site fool.co.uk

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