Given the volatility of stocks and bonds, many investors assume that gold is a smarter investment. If you also want to become a goldbug, you have several options. You might invest in gold stocks or gold mutual funds, but these can be rather volatile, too. You might buy into gold accounts at bullion banks, which require large minimum investments, or gold certificates and pool accounts, which don't. Gold coins or bars might be tempting, but you'll need a safe place to store them.
David Kathman of Morningstar.com has noted that "Returns aren't the point when you're investing in gold; diversification is ... A small amount of gold alongside your stocks can be a stabilizer." But all does not glitter in the world of gold. In his seminal book "Stocks for the Long Run" (McGraw-Hill, $30), University of Pennsylvania finance professor Jeremy Siegel reveals what a dollar invested in various things would have grown to from 1802 to 2001 (yes, nearly 200 years!): stocks, $599,605; bonds, $952; bills, $304; and gold, 98 cents. (Amounts have been adjusted for inflation.)
So, through many wars and economic times even more troubling than those we face today, gold hasn't proven to be a great long-term investment. True, it has zoomed up in recent years to nearly $700 per troy ounce, but that's a level it approached back in the late '70s and early '80s, and it spent most of the intervening years in the $300s and $400s.
In Fortune magazine, David Rynecki noted: "Gold investors are notoriously bad forecasters. From 1985 to 1987, for example, a collapse in the dollar boosted gold 76 percent and had many metalheads predicting an extended rally. Instead the price fell 15 percent the very next year." He adds: "Even bullish gold pros caution the average investor to put no more than 5 percent of a total portfolio into gold-related holdings and say it's safest to invest through funds."
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