Monday, October 26, 2009

Stocks and Gold Team Up

So far this year, an odd couple has emerged as big winners in the financial market. The Dow Jones Industrial Average is up 14 percent, while gold futures are up 19 percent.

Traditionally, an increase in the stock market reflects a majority bet on an economic recovery, while an increase in gold prices represents a rising fear of instability. Consequently, these two investment options are usually at odds. However, low interest rates and heavy government stimulus have poured cheap money into financial markets, helping stocks. Yet the creation of all that money, together with the Federal Reserve's maintenance of near-zero benchmark interest rates and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and economic volatility. This, in turn, creates a growing interest in gold.

While many institutional investors place large bets on gold, I believe gold futures should not compose more than 5 percent of a portfolio for an individual who is preparing for or already enjoying retirement. While it's true gold futures have quadrupled to $1,055 a troy ounce from just $250 in 1999, after adjusting for inflation gold would still have to double to $2,291 to reach its 1980 high, indicating this investment has not been a solid long-term investment. If you are interested in gold, be sure to purchase gold futures on a legitimate exchange, not those corny gold coins you see on television.

Of course, these type of investment decisions and building a well-rounded portfolio can get complex, and a financial advisor can help. It's best to speak with an independent fee-only financial planner to make sure your investment portfolio represents your risk tolerance and investment goals before taking any action.

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