Gold

The relentless advertisements from companies eager to sell precious metals do a great job creating interest in the market for gold, but there are many considerations before any commodity should be purchased. Investors need to consider their objectives and willingness to take on risk.

Gold and other commodities are quite distinct from many of the stocks and bonds that should make up the lion's share of most portfolios. While stocks can lose all their value if the underlying company goes bankrupt and bonds go into default every day, gold will never be worth nothing. At the same time, price run-ups in excess of 300-400% simply will not happen in the lifetime of someone purchasing today. This is wildly different from stocks which can consistently rise 10% a year with no appreciable harm to its inexhaustible long-term potential. If gold is trading at historically high levels, it may certainly rise to a new plateau, but it will not turn a pauper into a prince.

Gold is primarily valuable as a hedge against inflation. Unfortunately, just as gold is sure not to lose as much value as other investments might, gold will probably not create substantial wealth over the long term.

Many investors worry that the stock market does not always rise. There have been ten year periods in recent American history when the stock market did not rise at all. But gold isn't immune to this sort of risk. In 1980, at its all-time high, gold sold for $850 an ounce. Nineteen years later, gold traded for under $253 an ounce. Luckily for recent investors, gold has since rebounded back up into the vicinity of $700 an ounce. It's generally not fair to use data from market highs to demonstrate that if you have exceptionally bad timing, you can lose money in any market, but the general point with gold is that it will not make you rich.

If all that glittering gold still holds your interest, consider investing in the companies that mine for gold. Many of these companies use derivatives to reduce their exposure to losses caused by a decline in the value of gold, so they don't serve the same function as gold itself. Rather, these companies benefit from rising worldwide demand for gold in electronics and jewelry. Given gold's unique physical properties, even just the use of gold for electronics is likely to ensure the success of these companies. And the rise of a substantial middle class in India and China will spur tremendous demand for jewelry made of this precious metal.

Just be careful to disregard price to earnings ratios when evaluating mining stocks. Mining companies should be valued on the basis of how much gold is in the ground. Right before the deposit runs out, most mines are running at peak profitability. Make sure exploration continues or you could end up with an empty mine that made a great deal of money last year for someone else.