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 INDEX  >  Gold is not the next Disaster
Published: Monday, 4 Oct 2010 | 9:55 AM ET

 

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With gold hitting all-time highs, talk about a gold bubble grows increasingly louder. The skeptics say that this commodity cannot go higher and a crash is inevitable. Abandon this tangible asset before it's too late, they cry. I disagree. For all practical purposes, gold is no longer a commodity. Instead, it is portfolio insurance in age of unprecedented anxiety and uncertainty.

Gold is at a high price because high anxiety reigns. While some believe the good old days of calm are just around the corner, I believe this is not the case. The global economy is at an inflection point and as economic strength shifts to emerging markets, turmoil will continue. Gold provides a hedge as the world changes. One seldom discussed reality is that for many investors, gold is no longer just a commodity but now an alternative currency.

With concern about record deficits for the United States and Europe, central banks around the world are stockpiling gold as an alternative to paper money backed by fragile economies. Gold stockpiles are now an important part of many countries currency reserves and this will surely continue if deficits remain high in developed economies. Demand is present foor gold reserves. It used to be that conservative companies like Berkshire Hathaway [BRK.A 123190.0 -724.00 (-0.58%) ] and General Electric [GE 16.12 -0.24 (-1.47%) ] were the type of safe investment that investors flocked to in times of uncertainty. While these assets (and all blue chip stocks) have merits, the relative safety of all equity assets has been called into question over the last two years. Economic and structural headwinds significantly impact corporations and this will not change for the foreseeable future. I am not saying to give up on equity assets and fixed income positions.

Depending on your circumstances, these assets might make sense as you build a strategic allocation for the coming years. And it's important to have a commodity layer in your portfolio strategy as emerging market appetite continues to grow. Energy, industrial metals, food products, and other consumable assets all have a place in most investor's portfolio strategy. And look at gold as well.

Could gold fall in price? Of course. Can Gold Continue Its Bull-ion Run? Any asset that has had the kind of run that gold has had could easily be hit with a correction. Profits are not a straight line up and you would be wise to average into this asset with a long term view. Recognize that short-term speculation on precious metals is fraught with risk. Look at this asset as a long-term balancing asset for your strategy. Don't be tricked into believing, despite marketing campaigns and flashy advertisements, into believing gold is an automatic short-term profitable investment.

There is no automatic investment that will guarantee returns including gold. Still, I believe that if one is patient, a long-term viewpoint will be rewarded. Be just like central banks around the world and hedge your portfolio with a hard asset that has a lasting value. Balance your portfolio. Consider gold as a strategic part of your investment plan.

 
 
© 2010 CNBC  Article Source
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As with all investments, the price of precious metals changes rapidly, and as such should be considered volatile. Upon entering the metals market, the risk of loss is solely that of the client. Only individuals who are capable of sustaining a capital loss should consider purchasing precious metals. Acquisitions in precious metals which are financed are considered high risk.
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