Dear Mr. Suffrin: I'm thinking about investing in gold. I'm 16 and earn $25 per week baby sitting.
My mom and dad give me another $25 a week. And I already have $5000 in a savings account at the bank because my granny gave me an inheritance when she died a few years ago.
I also have $1000 in a mutual fund. I'm thinking about leaving $1000 in the bank and $1000 in the mutual fund and then investing $4000 in gold.
I also want to buy more gold by investing $100 per month from my baby sitting.
If something goes wrong and we have another Great Depression like we were taught about in school, the gold would keep me going because it never loses value.
I hear it's a good investment because the price keeps going up and up and up. Do you think my plan is a good one? - Golden Girl in Destrehan
Dear Golden Girl: First you should determine when it is you will need your savings.
If you will need it for college then the money should be invested for the short term in CDs, bonds, etc.
If you will not need your savings until retirement, then placing a portion of your savings in gold is a good idea, but not the majority of it.
The reason is, as you stated, gold is the only “thing” since mankind started printing money that has not lost its value relative to any currency.
So you buy gold to prevent the loss of purchasing power should the U.S. dollar become worthless.
However, the price of gold per ounce can go down, therefore, the price you paid could be worth less than what you originally paid for it.
Remember, gold hit a high in 1980 of $850 and it is now only at $670.50.
In addition, gold does not pay interest, dividends or capital gains - unlike bonds and stocks, therefore, it only appreciates by an increase in value not by throwing off income.
Also, you have to consider how you are going to invest in gold. Will you buy coins, gold company stock, or exchange traded fund.
If you buy a gold company stock or exchange traded fund, you don’t own pure gold.
Therefore, if there is a depression and the U.S. dollar is worthless, you have to sell the stock or exchange traded fund to get your money – this is not “pure” protection because you can’t get your hands on the gold.
Your plan has problems: your proposed portfolio lacks diversification, your perception that gold only rises in value is incorrect, what form will you buy it (storage) should be considered, it is not income producing, your time horizon has not been mentioned.