The Color of Money

For investors chasing a secure investment, gold is not the silver bullet

By Michelle Singletary
Washington Post / August 28, 2011

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Hear that pop?

It’s the price of gold bursting.

Oh, gold prices may go up again, but investment advisers and regulators are warning investors to be careful about putting too much money in gold.

As the market has vaulted up and down, investors have fled to gold. But have all these investors chasing what they think is a secure investment created a bubble?

You bet your glittery gold bullion, says Wells Fargo Private Bank.

“We believe that we have reached the point where we can confidently state that interest in gold investing has reached the level of a speculative bubble,’’ the bank’s investment team wrote in a market update Aug. 15. “Prudent investors should be very wary of having substantial investment exposure to this precious metal in their portfolios.’’

With very little warning, the bottom can drop out on gold prices, the report said. During a six-month period in 2008, gold lost more than 30 percent of its value. In the 1980s, in just over two years, the price plummeted about 65 percent.

And what do you know, not even a week after Wells Fargo released its market update, a Bloomberg report led with this: “Gold plunged in New York, heading for the biggest drop in 18 months, on speculation that financial markets may be stabilizing, eroding the appeal of the precious metal as a haven.’’

Bullion fell more than 5 percent in two days of trading last week. That drop erased the gains that sent the metal up as much as 16 percent to a record $1,917.90 an ounce, Bloomberg said.

“We are seeing the exact same behavior at the height of the tech bubble, housing bubble, and the Japanese Nikkei bubble,’’ Erik Davidson, of Wells Fargo Private Bank, said. “Excuse the pun, but we are crying out to investors that gold is not a silver bullet.’’

Unlike investing in a stock that pays a dividend or in real estate where you can collect rent, gold has no inherent earnings power, Davidson said. Investors have to hope someone else comes along and pays more than they did. He points out that when gold hit a record $850 an ounce in January 1980, it took until January 2008 - 28 years - before investors buying at the high broke even.

Last week, the North American Securities Administrators Association and Financial Industry Regulatory Authority both issued warnings to investors to watch out for gold-related scams.

Gerri Walsh, FINRA’s vice president for investor education, said, “We were seeing scams increasing that were tied to gold.’’ In one typical con, a promoter gets investors to pony up money for equipment to reopen a dormant mine.

It’s the fear of economic Armageddon that is driving up gold prices, Davidson said. Investors need to curb their enthusiasm, he said. Gold is not going to climb in perpetuity. “We are not saying take your gold investment to zero, but certainly this is not the time to jump on the bandwagon.’’

Michelle Singletary is a columnist for The Washington Post.

SOURCE: Bloomberg News