Thu 24 Sep 2009
With the stock market floundering for almost two years, there is a good chance someone advised you to consider gold as an alternative. Gold prices are near an all-time high. And there are valid arguments for holding a limited amount of gold in a diversified investment portfolio. But those who are considering gold as an option need to understand that it can be a highly volatile and risky investment choice.
There are several ways to invest in gold. They range from owning gold bullion, to gold coins, to gold mining stocks, to gold mutual funds or gold ETFs. Many investors prefer gold funds or ETFs because they offer trading convenience and easy liquidity.
The chart below shows performance of an ETF, SPDR Gold Shares, over the past year. The gold line on the top portion of the chart is a 50-day moving average of the price. Currently the fund is well above its 50-day MA, but the price appears to be rolling over instead of continuing its recent break out.
The middle portion of the chart shows trading volume and you can clearly see that trading volume has been falling off and is well below February and March peaks. Below the volume section is a moving average convergence divergence (MACD). This indicator is showing that gold has reached an overbought status and a correction of some sort is likely. The bottom section of the chart is a simple momentum indicator and it is also showing that momentum is falling and could quickly turn negative.
What all this indicates is that for an investor looking to buy gold, a better opportunity is likely to occur after what appears to be an impending correction. Merely looking at the price fluctuation of the past year one can see that gold is volatile. Even if it maintains its uptrend, it is likely to fall back to its 50-day moving average–something it has done many times over the past year.
Historically, gold has been considered as a hedge against inflation. That relationship has not proved true for many years, however. While rising inflation is a strong future possibility, for now the Federal Reserve continues to issue statements indicating that inflation is not an immediate threat.
Buying gold simply because the stock market has not performed well carries high risk–particularly for conservative and moderate investors.
So for now perhaps the best rationale for buying gold would be as a speculative investment suitable primarily for the most aggressive investors and then for only a small portion of their total portfolio.