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Gold Is The Riskiest Investment In The World

Golden Years Gone

Gold is one of the most useless substances known to man, yet paradoxically, one of the most valuable. It has been used as a store of value for thousands of years, but for me, it’s a massive store of risk.

Yesterday I was talking to a friend whose elderly parents recently sold their house, and were waiting to move into a shared ownership retirement home. They put the £100,000 proceeds from their property sale into gold. So far, they are down £20,000. This is big money to them, and they’re shell-shocked. They thought gold was a store of value.

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All That Glisters

King Midas wasn’t the only one who lost his investment touch at the sight of gold. In 1980, following the Islamic revolution in Iran and Soviet invasion of Afghanistan, nervy investors piled into the precious metal. The price spiked to $850 an ounce amid a buying frenzy, only to collapse to $250 as the panic subsided. It stayed at that price for more than 20 years. Does that sound like a safe investment to you?

When the credit crunch struck, gold came back into favour, as it generally does in times of financial uncertainty. Early birds enjoyed glittering returns. In January 2008, gold was trading at $922 an ounce. By May 2011, it had broken through the $1,500 barrier, prompting hedge fund manager John Paulson’s claim that gold could hit $4,000 within five years. 

Gold Does Tarnish

By August 2011, the price topped $1,900, and Paulson looked prescient. Today, it trades at $1,245 an ounce. The search term ‘Buy gold’ has plunged to its lowest level since May 2009, as investor interest wanes, according to Bullion Vault. Risky. No?

If you want to trade the gold price, don’t let me stop you. With gold at a four-month low, now could be a buying opportunity. Trouble in the Ukraine could quickly force the price up. So could any number of events, such as a Chinese property crash, or the fall of the euro, or a US debt crisis. Just make sure you understand what you are doing. Speculating.

Ebulliant On Bullion?

If you reckon you can play gold and win, you can join the traders and investors placing their bets on exchange-traded physical gold funds such as the $33 billion SPDR Gold Trust (NYSE: GLD.US) ETF, which has dipped more than 5% in the last month from $126.49 to $120.01. Year-to-date, it is still up 3.3%. 

London-listed alternative, Gold Bullion Securities (LSE: GBS) is also down around 5% over the month, trading at $119. It has also scraped a positive return year-to-date, however, returning 1.5%.

Is the gold price set to rebound? Frankly, I’ve got no idea. Nobody knows. If you treat it as a flutter, or diversification for a small chunk of your portfolio, that’s fine. Just don’t put your life savings into it.

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Harvey doesn't hold any stock or fund mentioned in this article