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As an investment, gold doesn’t always glitter

Provided by RBC Wealth Management
and Dave Dupont

As an investment, is gold always a dazzling success story?

Many people apparently think so. If you were to look at the first decade of this century, you’d have said these investors had the numbers on their side, because gold prices shot up from around $280 per ounce during 2000 to $1,888 an ounce during August 2011. And, for the most part, this same decade was not a good one for the stock market so it is not hard to see why a generation of investors might think that gold is perpetually a good alternative to equities.

Of course, the contrasting movements of gold and equity prices during that decade are not unrelated. When the stock market is volatile, investors often flee to gold as a “safe harbor,” and the increased demand drives gold prices up.

On the one hand, gold is a finite and relatively rare commodity, so it will likely always maintain considerable value. However, as recent history has shown, that value will not always move up. Like any investment, gold will rise and fall over time — and sometimes, those drops, like the gains, can be pretty big.

Also like any other investment, gold carries its own set of special risks, which will vary, depending on the specific investment vehicle.

For example, if you bought a gold futures contract (an obligation to buy gold at a predetermined future date and price), you could lose money if gold falls, because you would still be obligated to complete your contract at the higher, agreed-upon price. If you purchased physical gold, in the form of coins, bullion or bars, you’d face storage, security, insurance and liquidity issues. As an alternative, you could buy shares of stock in gold mining companies, but you need to do a lot of research beforehand, because some of these companies may still be in the gold-exploring stage — and there’s no guarantee their explorations will lead to profitable discoveries.

Also, even when its price is considerably lower than it is today, gold is still a fairly expensive investment compared to other choices.

However you choose to own gold, keep in mind this type of investment should probably only make up a small percentage of your portfolio, with the exact amount depending on your goals, risk tolerance and time horizon. Instead of counting on gold as a sure ticket to investment success, seek to maintain a diversified portfolio containing high-quality stocks, bonds, government securities and other vehicles.

This article is provided by Dave Dupont, a Financial Advisor at RBC Wealth Management. RBC Wealth Management does not endorse this organization or publication.

RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC

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