When Does Gold Become Too Expensive

Whenever there are either economic challenges or issues, or widespread doubt about the economy, many investors have historically turned to gold as their investment of choice. In this present prolonged upturn, gold has risen in price to historic highs, and the price has steadily increased to its present record levels. However, just like the stock market was considered a "sure thing" by some before its downturn, and the housing market had its own "bubble," wouldn't one eventually believe that the "gold bubble" will also deflate somewhat? When gold was $700 an ounce, when the price went up by thirty-five dollars, that represented a five percent increase in value. With gold at close to double that price, that same thirty-five dollar increase only represents a two-and-a-half percent price increase.

What is also often overlooked by less sophisticated investors, attracted by the incredible amount of publicity about the price, and some rather unscrupulous, or, at best, somewhat misleading advertising, is that the market for gold is far less liquid than for trading stocks, and the spread (or difference) between the asking price (price you purchase at), and the selling price (price you receive when you sell) is somewhat uncontrolled, and can vary widely.

I have been asked whether it is presently a good time to purchase bonds. After all, they are safer than stocks, and far easier for some to understand. However, since interest rates are now at historic lows, bonds are selling at high prices, and yields to maturity are quite low. How long will that last? Without a crystal ball, nobody can be certain or predict the future, but based on historical cycles, it would appear to be less than the optimum time to purchase bonds.

Many people ask if gold jewelry will necessarily go up in value. One must remember that the price and value of jewelry is based on multiple factors, including artistic work, details, eye appeal, as well as the gold content. It is also generally a case of supply and demand.

Can one make money buying gold? Short term, my guess is perhaps, but longer term, I would guess that the price of gold will stabilize, and the "bubble" will deflate. Those with substantial portfolios might consider gold as a small component of their overall portfolio. However, I would recommend that anyone interest in including gold realizes it is a high risk, unpredictable component, and that the most reliable, safest way to purchase gold is incrementally, in small amounts, at a variet of different prices at a somewhat regular basis. This is similar to the concept of "dollar cost averaging" in stocks and mutual funds.

Nobody knows with certainty what the future holds for the price of gold. However, I would suggest that anyone considering purchasing gold as a component of a portfolio, fully understand the risks, inconsistencies, and other caveats.