Buying gold as a safe haven

Question: In the midst of the turmoil on Wall Street, I’m thinking of investing in gold, specifically bullion or gold coins. Do you think this is a good idea? —Roderick Gaerlan, Redondo Beach, Calif.

Answer: Ever since the financial markets began going haywire this year, I’ve been getting lots of emails from people who are considering buying gold as a way to weather the crisis.

That, I can understand. Investors have come to see gold as a refuge in a sea of uncertainty and volatility, an investment that will hold its value even as the world collapses around it.

What I can’t fathom, though, is how gold acquired and manages to maintain this reputation as an anchor of stability. It doesn’t make sense.

I mean, just look at a chart that tracks the price of gold so far this year. It started out at about $850 an ounce in January. As oil and gas prices started to climb and pundits began predicting that oil might hit $200 a barrel, gold quickly shot up, spiking as high as $1,011 an ounce in March.

After breaking the thousand-buck barrier, however, gold retreated and began bouncing around in a trading range of $850 to $950 in the spring and early summer. It flirted with its previous high briefly in July, hitting $986 an ounce, but then dipped back below $750 in September. It rallied again to break $900 an ounce in early October, but has since dropped below $800, closing out October at $731 an ounce.

So let’s see, that’s a 19% gain from the beginning of the year to its March peak, then a 26% drop from March to the September low, a 20% rebound to early October and then another 19% decline to the end of the month, putting gold 14% below where it began the year and 28% below its March high.

The point isn’t so much that as of the end of October gold was in the red for the year to date. It’s that if you’re looking to avoid gut-wrenching ups and downs, this isn't much of an improvement from the stock market. It’s kind of like getting off Six Flags’ Kinga Ka rollercoaster and jumping on Coney Island’s Cyclone. The drops may not be quite as steep, but you’re still in for a white-knuckle ride.

That’s not to say that you can’t make money in gold. You can if you’re able to get in and get out at the right time (although, human nature being what it is, most people are eager to buy when gold is in the news and prices have already jumped, not when it’s unpopular and its price is languishing).

And since gold prices are not highly correlated with stock prices, you can also make a case for investing a small amount of your assets (maybe 5% to 10%) in gold as a way to diversify your portfolio.

I’m not a big advocate of this approach, but if you’re going to do it, I’d say precious metals mutual funds or a gold ETF is a simpler, cleaner and better way to go than buying coins or bullion. (I’d also add that you have to be willing to rebalance your portfolio periodically for this strategy to work.)

I don’t think it’s ever a good idea to move all of your investment stash into any safe haven or, in the case of gold, putative one. As I’ve noted before, the money you’re investing for longer-term goals like retirement should be invested in a blend of stocks and bonds that’s appropriate given your risk tolerance and how long it is until you’ll need the money.

That said, virtually all of us also need to keep some portion of our assets protected from the ups and downs of the financial markets. Here, I’m talking about an emergency fund or, in the case of retirees, an account that holds 12 to 18 months’ worth of living expenses.

But the right place for this segment of your portfolio is a totally liquid and secure investment such as a high-quality money market fund, short-term CDs or savings account, not gold. For, whatever other qualities it may have to offer, stability of principal is not one you can count on from gold.