Financial Abundance

In the story of the birth of Christ, the Magi gave Jesus gold, frankincense and myrrh. As many of us celebrate the Christmas season, perhaps we should consider giving ourselves one of these gifts, the gift of gold.

I have never been a gold enthusiast. However, gold can be both a hedge against inflation as well as a “safe haven,” when the investment markets are in turmoil. Even with declining inflation during the later part of 2008, November CPI was still up 1% over November of 2007. In the short term we could see deflation. However, with historically low Fed rates and a trillion dollar “stimulus package” on the horizon, long term inflation is a very real potential. In the 1970’s, gold was an excellent investment during that period of extended “stagflation.”

If the markets continue in turmoil, gold may also be a good investment, serving as a “safe haven” investment while other financial markets recede. In 2008, with the S&P 500 down 37%, the bond market down over 20% and most other commodities down, gold is virtually the same price as it was on January 2, 2008.

Since the beginning of 2005, the price of gold has doubled and is now at approximately $850/ ounce. Until 2008, the all time high for gold was reached in 1980 with a price of 850/oz. Based on this, it might appear that there is very little upside in a gold investment. However, in inflation adjusted dollars, the $850/oz in 1980 is almost $2200/oz. in 2008 dollars. Thus, on an inflation adjusted basis, gold is now trading approximately $300/oz. in 1980 dollars.

While gold should never represent a large portion of an investors portfolio, when we are considering a prudent asset allocation, we must consider the current financial turmoil. If inflation does increase as the economy recovers or if the economy deteriorates even more than is expected, the price of gold could increase. Thus, all of my clients have approximately 5% of their liquid assets in gold, which will remain in their portfolio until economic conditions change.

If you decide to add gold to your portfolio, one of the easiest ways of owning gold is through an Exchange Traded Fund (ETF). The most popular gold ETF is the streetTRACKS Gold Shares ETF, with the call symbol GLD. ETFs are traded like stocks and are easy and inexpensive to buy and sell through a discount brokerage house.

While a gold investment is not for everyone, adding the “Magi’s Gift” to your portfolio may increase your future portfolio returns.