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Will gold add luster to your investment portfolio?

September 2nd, 2011, 1:03 pm by dtova

In an uncertain economy with a volatile stock market, many investors turn to gold as a safe haven. As a result, the price of gold is at an all-time high. The two questions I am asked the most are:

Is it still a good time to buy gold?
Are we heading for a bubble?

Good time to buy gold? Gold fever is highly contagious, but the best defense is to stick to basic investing principles, which tell us to “buy low and sell high.” Given the current high gold prices, it would seem counter-intuitive to load up on gold now.

Are we heading for a golden bubble? That generally happens when there is a high demand for an asset, which can inflate its price and overstate its value. These overvaluations can cause the bubble to burst and force the price to fall lower than its fair market value. Bubbles are always tough to predict while they’re happening, but they’re often obvious in hindsight.

Invest in gold? Let me count the ways
There are different ways to invest in gold and it’s up to you to decide what suits you.

- Want to keep your gold close at hand? Then gold bullions, an investment grade of gold that comes in bars and coins, may be the best option for you.

Be sure to buy gold through a reputable dealer, someone with a long history. If they advertise online, look for dealers who openly post their prices. Dealers that belong to professional associations such as Jewelers of America or the American Gem Society are committed to ethical standards. Also, check them out with the Better Business Bureau for any complaints.

Shop around for a few quotes on the same day because prices change daily.

- Gold can be part of your retirement plan. The IRS allows Individual Retirement Accounts (IRAs) to own certain types of gold coins and other precious metals. You would need to find a trustee that specializes in setting up a self-directed IRA. For a fee, they handle transferring your retirement funds to a gold dealer as well as physical transfer and storage of the precious metal.

- If direct ownership is not your cup of tea, invest in gold by buying shares of an exchange-traded fund (ETF) that tracks the value of gold. One such fund is SPDR “Spyder” Gold Shares. While you don’t take physical possession, your shares are backed by actual gold. The ETF shares trade easily in the stock market.
- The last option is to invest directly in gold mining company stocks with one caveat: be sure to exercise caution because, like any other stock they can be volatile.

If you choose to invest in gold, other precious metals or oil by purchasing funds or stocks, the 5 percent rule applies. That means it should not make up more than 5 percent or so of your total portfolio.

Then again if you believe that the U.S. dollar’s dominant position as the world’s reserve currency is doomed, you will probably want to load up on gold bars. But, in all seriousness, when it comes to sensible investing, remember that logic trumps emotion every time.

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

Posted in: Investing • How to invest in gold | Post a Comment »

Answering Your Qs about Investing

July 31st, 2011, 12:10 pm by dtova

Question: Is it a good idea to take out a home equity line of credit on our home to fund the purchase of investment property? Also, we are being offered a variable rate. Is that a good idea? – Barbara L., Fort Collins

Answer: Home equity lines of credit (HELOCs) and home equity loans let homeowners borrow against their home’s value. Back when home prices were soaring, this kind of borrowing was very popular. Today, many homeowners owe more than their homes are actually worth. So, using your home as a “cash cow” may no longer be prudent or possible as lenders tighten their borrowing standards.

Assuming you have a good credit score, you can get a line of credit equal to about 80 percent of your home’s value, minus what is owed on your mortgage. It comes with a tax benefit. You can generally deduct interest on a home equity debt up to $100,000 (or $50,000 if you are married but file separately). Get more info from the IRS Publication 936 (www.irs.gov/pub/irs-pdf/p936.pdf).

Now for the downside

First and foremost, your house is at risk if you don’t repay your HELOC. In the event of a default, a HELOC is not eligible for “debt forgiveness.” If you plan to take out a loan that approaches 80 percent of your home’s value, the risk of default is a likely scenario. So before tapping into your home equity to buy the investment property, make sure you are able to pay off the loan as quickly as possible. Choosing a variable or fixed rate will depend on your risk tolerance and cash flow. The variable option may work if you are comfortable with the fact that interest rates could rise in the near future and remain high.

However, if you plan to fund the full amount of the investment property (as opposed to a down payment), with current low interest rates, it may be more cost effective to lock in a fixed interest rate on a loan. Either way, consult with a real estate professional about price stability in your neighborhood.

Question: I received a cash inheritance. What is the best way to avoid paying the high taxes? I would like to start college plans for my grandkids and help my daughter pay off her student loans. We are already IRA rich and cash flow poor. Where else should we put the rest of this money? – Clara H., Colorado Springs
Answer: Since you received your inheritance in cash, you won’t have to share with Uncle Sam. You could fund a 529 College Savings Plan for your grandkids and actually receive a tax break from your estate taxes. You can certainly pay off your daughter’s student loan.

Since you are “IRA rich and cash flow poor,” consider putting money aside for emergencies. And shop for good rates if you choose to open a money market account or purchase a CD. Visit www.bankrate.com to look for the best CD rates. CDs with longer terms typically offer the best rates, but be sure you can afford to tie up your money for a year or more. If this is your emergency account, you may want to stick with either a money market or savings account.

You can also open a “plain old vanilla” brokerage account to add a non-retirement account to your IRA mix. If most of your gains come from the appreciation of your brokerage account funds, you would be taxed at the favorable capital gains tax rate as opposed to the ordinary income tax rates that apply to your IRA.

Posted in: College Planning • Debt Management • Homebuying • Investing • Tax Planning | Post a Comment »

The Kiddie Tax and ways to avoid it

July 8th, 2011, 11:01 am by dtova

Question: I am curious, how is kids’ income taxed?

- Paula M., Colorado Springs

Answer: You would think that paying taxes on a child’s relatively small income would be a no brainer, but actually it’s a little more complicated.

Your kiddo’s income is generally one of two types; earned and unearned. The earned income comes from employment, such as working on the weekends, which gets taxed at a low income tax rate of 5 or 10 percent. So far that’s not a big deal, right?

But let’s say that your child also has an investment account and you sell some of the stock. This type of investment income (or unearned income) is taxed differently than earned income. It falls under the so-called “kiddie tax rules” and the tax kicks in when the investment income (such as interest, dividends and capital gains) exceeds $1,900 per year. Anything above $1,900 is taxed at the parents’ higher income tax rate.

Let’s break this down a bit. Initially, the kiddie tax applied to children under age 14. Later it was expanded to cover kids under 18 and dependent, full-time students under age 24. So if you have a 17-year old who is married and files a joint return with his spouse, he is excluded from the kiddie tax rules.

Here is how it works:
1) The first $950 of unearned income is tax-free
2) The next $950 is taxed at the child’s low income tax rate of 5 or 10 percent, depending on his or her earned income
3) Any amount above $1,900 gets taxed at the parents’ higher rate

Question: Are there ways to avoid the kiddie tax?

- Chris L., Colorado Springs

Answer: There are always ways to beat Uncle Sam…legally of course! Since the kiddie tax only applies to investment income, you can generally avoid it with investments that generate tax-free income or ones that defer income until your child is no longer subject to the kiddie tax rules.

When choosing appropriate investments for your child, give consideration to their long-term horizon and diversification. Putting your child’s money into conservative savings bonds or municipal bonds just to generate tax-free or tax-deferred income is probably not a wise move. A much better fit would be growth stocks and mutual funds. These typically do not generate taxable income because they are focused on capital appreciation.

If you own a business and could give your child some work, you can actually have your cake and eat it too. Your child would have an earned income that does not fall under the kiddie tax rules, and you receive a business tax deduction. Plus he or she could open up a Roth IRA, an awesome long-term investment that could shelter earnings from taxes.

Posted in: Investing • Tax Planning • avoiding kiddie tax • kiddie tax | Post a Comment »

Renting your home: cash cow or bum steer?

June 13th, 2011, 7:08 am by dtova

Thinking of becoming a landlord? The experience can be both rewarding and nerve-wracking. A reliable tenant who pays the rent on time and takes care of your place is your best-case scenario. But be advised: Renting out your residence has financial implications.

Financial ramifications of renting residence

First and foremost, turning your residence into a rental property generates a new stream of income. However, reaping the benefits requires being in it for the long haul.

While rental income is taxed as ordinary income, your tax bill could be reduced thanks to numerous tax breaks for landlords. Because you’ll be able to deduct certain expenses and depreciate your property, it’s important to consult your accountant.

When you sell the property, tax implications will be based on the period of time you lived in the home prior to the sale. You may be required to repay any depreciation deductions taken.

With rent comes responsibility

Renting comes with a huge financial and management responsibility. If you are moving out of state or prefer not to deal with the tenants directly, find a property management company to do the heavy lifting for you. This will cost you about 10 percent of the rental fee.

It will be very important to have money set aside to cover unexpected repairs and/or unpaid rent.

To determine the amount to charge for monthly rent, check to see what a similar property in your area rents for. Look in the newspaper and on websites such as Craigslist.com and Rent.com.

So, how do you vet a prospective tenant?

1) Attract a better quality tenant by making your home more appealing. You don’t have to break the bank, but a fresh coat of paint and updated carpeting may do the trick. An attractive exterior and well-tended yard sends the right message too.

2) Research prospective tenants by checking credit scores, proof of income and references. Carefully study the rental application and verify their employment.

3) Ask a friend to sit in on the interview – this will help you be objective.

4) Have an airtight lease agreement reviewed by an attorney and make sure to collect a security deposit.

The bottom line: Renting out your home may appear to be the answer to your cash flow problems. But before you start dreaming about what you could buy with your newfound largesse, play out the worst-case scenario. Determine how long you would be able to cover unpaid rent and how much you willing and are able to fork out for repairs. Before you decide to become a landlord, understand the risks and consider the financial pitfalls.

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

Posted in: Renting your home • turning your home into a rental; tax impact of renting your home | Post a Comment »

Investing. Can you do well by doing good?

May 23rd, 2011, 5:30 am by dtova

Question: I’ve seen headlines about socially responsible investing. How does it work and does it make sense to have socially responsible funds in my investment portfolio? - Dan B., Colorado Springs

Answer: It could be said that socially responsible investors use both their heart and their head when it comes to making financial decisions. Socially responsible investing (SRI) integrates personal values and social and environmental concerns with investment decisions. SRI is also known as mission investing, sustainable investing, green investing, etc.

Where do you stand?

Whether liberal or conservative, there are causes to support in the SRI world. Some are concerned about tobacco and alcohol. Others are not. But there can also be crossover, as SR investments can be both environmentally friendly and anti-nuclear, for example.

The first SRI fund, started in 1971 in the U.S., grew to $2.29 trillion by the end of 2005. The Social Investment Forum reports that in 2010 the SRI market accounted for $3.07 trillion out of the total $25.2 trillion U.S. investment marketplace. Social investments in the U.S. grew 380 percent from 1995 to 2010.

When it comes to influencing socially responsible change, money talks

Socially conscious investors speak with their pocketbooks to encourage corporations to improve practices on environmental and social issues and to build wealth in underserved communities by employing these approaches:
1. Screening for negative and positive causes, such as tobacco, alcohol, gambling, weapons, animal testing, environment, human rights, employment equality, community investment, etc.
2. Taking an active role in talking with companies on social and environmental issues.
3. Directing capital from investors and lenders to underserved communities, providing access to credit, equity, capital, and basic banking products.
Although market declines have impacted many SRI funds, I think that market volatility will draw more investors to SRI investing going forward. The added emphasis on responsible investing means that investors will pay more attention to how their dollars are being invested.
Resource arms investors with information

The Social Investment Forum (www.socialinvest.org) is a national membership association that promotes socially responsible investing. Its website offers tools for investors including an extensive database of SRI funds with screen profiles and performance data.

These market indexes, which differ in their emphasis on social characteristics, track SRI fund performance:

Domini 400 Social Index (DS 400 Index)
Calvert Social Index
Citizens Index
Dow Jones Sustainability Index

Two sides to the coin and the softer side of SRI

The upside is that SRI makes someone feel good about investing. The downside is that you automatically rule out some of the most profitable investments in the stock market, such as oil for example. An SR investor generally moves toward softer service type firms, such as health care and tech, as these tend to be more modern, more integrated and less discriminatory.

So, what should Dan do? If he decides to add SR funds, he should use the same fundamental approach as with any other fund. The key is always to be diversified. Once his core investment mix is in place, Dan can screen funds according to his personal values and ideology.

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

Posted in: Investing • Socially responsible investing | Post a Comment »

Before Jumping into Any Investment . . .

March 21st, 2011, 5:37 am by dtova

I can’t tell you how many times I have taken a call from a disgruntled consumer who got stuck in an unwanted investment and wanted to know how to get out. Unfortunately, in the majority of these cases the damage was already done, and the only choice left was to pay a hefty penalty.

A timeshare is one example of an investment that is tough to exit. Once you are in it, you are responsible for the financing costs and annual maintenance fees. If you suddenly decide that you can no longer afford it, or you simply want out, the only options are to sell it back to the timeshare company (good luck!) or find a willing buyer.

Another potentially frustrating investment is putting your money into an annuity or an investment grade life insurance. Both vehicles will lock you in for several years with no chance of getting out without taking a hit in penalties.

Here is what I suggest before you buy into any investment:

Have a plan. One of the biggest mistakes I see people make is shopping for financial products without a having plan — one that shows you how a particular financial strategy fits your situation and meets your goals. If you don’t have a plan first, you’re begging for trouble later.

Ask questions. I find that many people lack a basic understanding of how an investment program works and how to get out of it. The above mentioned investments are not necessarily bad investment vehicles, but they can be huge mistakes if you’re uninformed.

Watch for warning signs. Here are investments that you should stay away from — period. Beware of investments that are:

1) Exclusive — Only a select few will get this deal. Often a celebrity is used to add legitimacy to the investment. The status of celebrity is a draw, but I suggest you stick to plain, old vanilla investments. A simple investment may be boring, but it’s usually more stable in the long run.

2) Ultimate — If a promoter suggests they have the ultimate investment with unbelievable returns, don’t believe them. Ask questions. How do they plan to achieve those returns in today’s market environment?

3) Vague — Beware of investment strategies where the fees are not transparent. Insist on fully understanding how the investment works. What are the fees? What are the penalties to get out of the investment? Does the cost justify the benefit?

Common sense should tell you that if you don’t fully understand how to get in and out of the investment, you should stay out. There will always be bad apples out there who prey on unsuspecting buyers, but now you’re informed. Don’t jump first and figure out the investment later.

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

Posted in: Investing • annuity • timeshare • variable life insurance | Post a Comment »

The different kind of Job

February 14th, 2011, 7:55 am by dtova

Steve Jobs is taking a leave of absence from Apple for health reasons . . . again. The last time he did this, the whole affair was cloaked in mystery for a couple of months. Finally, the company owned up to the fact that Jobs wasn’t in the office running the company.

This time, Jobs reported to employees that he was going to take another sabbatical to work on his health. The way he handled it tells us a lot. It’s a different world out there for Apple and for Steve Jobs.

There is hardly another company in America — with the possible exception of Berkshire Hathaway — that has been more wrapped up in its CEO than Apple. This has not been a healthy situation for either Apple or Jobs. According to a recent company profile, there are 49,000 employees at Apple. That is a lot of people depending on one man to lead them.

What does that mean for the average investor who proudly holds Apple stock?

The question really ought to be what are we investing in, Steve Jobs or a company that makes gadgets?

When Jobs left the first time to fight liver failure and ultimately get a liver transplant, the company wasn’t the power it is today. Jobs functioned as both the public face of Apple and the primary product driver. But now, with the iPhone and iPad in big-time production and Apple ranked as the second largest market cap on Wall Street, Jobs isn’t the sole driver of Apple’s success. And history revealed something else the first time around: the company didn’t falter under Chief Operating Officer Tim Cook. It probably won’t this time, either.

The company is doing just fine. A recent earnings release attests that Apple is selling more gadgets for more money than ever before. First quarter earnings almost doubled from the same quarter a year earlier, while revenues rose 70 percent. Apple beat Wall Street’s forecasts on both counts: earnings by about 20 percent and revenues by 10 percent.

Management of expectations is key. Apple spent way more time on their last analysts call talking about supply-chain issues than anything else. They barely touched on development (or Steve Jobs). Why?

It’s a brilliant strategy, actually. Apple is lowering the bar so they can get over it come April, when its next earnings report will be released.

Another interesting evolution at Apple is that it is becoming more of a seasonal company. Gadgets sell heavily around Christmas, so each year their fiscal first quarter (Apple’s first quarter is October through December) is becoming more and more important. If you take out the introduction of the iPad last year, the first quarter would have easily been Apple’s biggest. This year, the odds are even greater that the largest peak just happened over the holidays. We’ll see if that remains true as the year progresses.

It is a different Apple: a gadget company that does not completely rely on its fearless leader for success. Steve Jobs can go on sabbatical now and return to the helm when he is refreshed and ready to wow us with new innovations.

Mystified by money? Ask Denisa and improve your financial literacy. Denisa Tova MBA, CFP®, CDFA is a Colorado Springs-based Certified Financial Planner and CEO of DaVinci Financial Planning. Submit financial questions to her at denisa.tova@gazette.com.

Posted in: Investing • Steve Jobs leaving Apple; Apple | Post a Comment »

Getting the Most out of your 401K

January 30th, 2011, 9:42 am by dtova

Bumping up your retirement savings contributions should be a top resolution this year. The problem is that most of us ditch our resolutions within a few weeks. Here are a few tips to help you follow through and turn this resolution into reality.

Just get it done!

If your company offers a 401(k) plan, take it. Saving for your retirement just doesn’t get any easier than that. You don’t have to decide to put the money away — it is automatically deducted from each paycheck. This completely removes temptation to blow it on something else and also reduces your taxable income, which means you put more in your pocket instead of in Uncle Sam’s pocket.

The maximum that most of you can put into a 401(k) this year is $16,500. Those over the age of 50 can catch up by contributing an additional $5,500.

If you have a 403(b) plan, which is similar to 401(k) but designed for employees of the public education and non-profit sectors, it is subject to the same limits.

According to a recent survey of more than 550,000 employees with 401(k) accounts, only 7 percent of workers came within $500 of contributing the maximum.

Don’t worry if you can’t contribute the max right off the bat. Start slow and work up to it.

Don’t leave free money on the table. Take your employer’s match.

If your company matches your 401(k) contributions, take advantage of it.

For example, let’s say your employer matches 50 cents for every dollar you put in your 401(k) up to $5,000 per year. If you are only contributing $2,500 a year, you are missing out on $1,250 of free money. That can really add up.

Leave it alone. Don’t check your account balance every month.

Seriously, don’t look at it. You will drive yourself crazy. This is a long-term plan. If you must, take a peek every quarter.

Then, do a comprehensive review once a year:

Take a close look at your investment choices. Your plan may have added new options.
Find out if you are you putting enough money away. If you received a raise during the year, consider adding more to your plan.
Use the savings from your reduced payroll tax (as introduced in the new tax bill) to give your 401(k) a boost.

Borrowing against your 401(k) is generally a bad idea.

When you borrow against your 401(k), you are essentially borrowing from yourself and paying yourself back with interest. But if you suddenly receive a pink slip, the entire balance is due. If you don’t repay it, it is treated like an early taxable distribution, and you will be stuck with a 10 percent penalty.

Borrowing against your 401(k) should only be a last resort.

Enjoy some good news.

Finally, there is good news on the horizon that will give you a better handle on 401(k) fees. Currently, the fees that are deducted from your investment earnings are very difficult to figure out.

The Department of Labor came out with a new rule last year that beginning in 2012 all 401(k) plans will be required to break down and disclose all of their fees. It’s far from a perfect solution, but it’s a good start.

Your 401(k) plan is your future. Take these few simple steps and build some security for your golden years.

Posted in: Investing • Retirement Planning • Getting the most out of your 401K | Post a Comment »

IRA Tax Break Resurrected

January 10th, 2011, 12:31 pm by dtova

I bring good news for the new year: Qualified charitable distributions from your IRA have been resurrected.

If your response is, I have no earthly idea what the heck is she’s talking about, hang on. I’ll fill in the details.

I’m talking about the tax bill compromise—a recently passed bill that revives a tax break from the past. But before we dive into the specifics, let’s start with a little background information.

If you have an Individual Retirement Account (IRA) and you turn 70 ½, you are required by law to take a set amount of money out of your IRA each year for the rest of your life. It’s not an option. You have to do it. These mandated amounts are called the Minimum Required Distributions or MRDs.

So when do you have to start withdrawing?

The first withdrawal must be taken by April 1 of the year after the calendar year in which you turn 70 ½.

For those of you who are looking forward to that influx of cash, go grab a leftover turkey sandwich, because you probably don’t care about the rest of what I have to say. But before you head for the fridge, let me give you a little more good news: You can always take out more than your MRD but not less.

For those of you who don’t want to withdraw from your IRA when the time comes, don’t get testy. You will be slapped with a steep penalty if you don’t do it — up to 50 percent of the amount that you did not take.

The IRS has a formula for calculating your MRDs. (No, it’s not a crystal ball. They actually came up with a real calculation.) Your MRD is calculated by taking the account value of your IRA as of Dec 31 of the previous year and dividing it by your life expectancy factor. For example:

Jack’s age in 2011: 73

2011 life expectancy factor: 24.7

(Based on the Uniform Lifetime table)

Jack’s IRA account balance: $320,000

(As of Dec 31, 2010)

Jack’s MRD amount: $12,955

($320,000 ÷ 24.7)

Based on the above example, Jack will have to withdraw a minimum of $12,955 this year.

If that “forced” withdrawal annoys you, you now have another option, thanks to the tax bill.

Maybe your IRA is not your life line. It is just extra money for you. You still have no choice at a certain age but to take your MRD, so why not put it to a good use and get a tax deduction?

Under the new tax law, you can instruct your IRA custodian to take up to $100,000 (per tax year) of your IRA money and donate it to a qualified charity of your choice. This distribution will count as your MRD for 2010 and 2011.

It’s a win-win-win. You are donating to your favorite cause, satisfying your minimum required distribution, and potentially sheltering yourself from taxes on the IRA distribution.

Of course, we’re dealing with taxes here, so there are lots of rules. For example, you can only claim a charitable contribution deduction for the portion of the IRA money that would be included in your income (the part that is considered non-deductable earnings). It’s worth your time to consult with your tax advisor about the details.

So if you’re dreading having to take your MRD this year, rejoice! You have another option.

Posted in: Charitable Giving • Investing • Retirement Planning • Tax Planning • Qualified IRA charitable deductions | Post a Comment »

What’s the Gold Rush?

December 19th, 2010, 8:33 pm by dtova

Question: I’ve been reading a lot about the price of gold rising and hearing advertisements pushing it as an investment. Is gold a good way to go?

—Jason B., Colorado Springs

Answer: You tapped into a popular subject, Jason. There are ads all over the place right now claiming gold is the ultimate investment. Let’s dig down to the facts.

Like any commodity or “real” asset, valuation of gold is straightforward. It’s purely supply and demand — nothing more. But commodities are different from most conventional investment assets. Stocks, bonds, or real estate give you cash flows worth something now and in the future when interest rates are factored in. Commodities just exist. They have no cash flows, so the price is only based on what others think they’re worth at a given time.

For instance, if a miner can pull gold out of the ground for $500 an ounce (in costs), he’ll keep producing as long as he can sell it for more than that. If the price of gold goes below $500, it’s not worth it for him to continue mining. He stops — and other miners probably do the same — and the dip in supply causes prices to eventually go up.

This is basic economics here. And let me add a bit of trivia, too. Did you know that all the gold that has ever been mined in the history of the world would only fill a soccer field about 6 or 7 feet high? We’re talking about a fairly small market here. But this only relates to the commodity production environment.

Demand is the driving factor. Gold has always traded as a currency rather than as a typical commodity (such as oil, wheat, or copper). It’s a fear trade. When global fear goes up, gold is a hedge against capital market negativity.

We’ve witnessed this over the last several years. When stocks, real estate, and other commodities rise, treasuries and gold fall, and vice versa. Investors turn to gold in risky times because of its “store of value.” They can’t lose with gold. But is that true?

Traditionally gold has been utilized as a hedge against inflation. Additionally, there has been a marked inverse relationship between the relative strength of the U.S. dollar and the price of gold recently. Should the Fed’s current monetary policies either increase the rate of inflation or weaken the dollar, gold price may increase further, already up by about 30 percent in 2010.

Jim Komadina, president of Colorado Resource Associates, a Colorado Springs based resource management expert, cites particularly strong Asian Central Central Bank and consumer demand in China for gold. “Supply and demand fundamentals alone would support an increasing gold price over the next several years,” he says.

As for the “cash for gold” phenomenon, the most important piece here is the haircut: what you get versus what your gold is actually worth. I don’t have any personal experience with this, but I would venture to say that gold being placed in the mail is unlikely to yield its true value. You pay a price for convenience. If you really want to sell your gold jewelry, take it to reputable dealers and collect several quotes to find out what it’s really worth before you complete a transaction.

Ultimately, you have to cut through the folklore when considering gold as an investment. Gold has a reputation of holding its value better than riskier capital market assets. But in truth, gold is a volatile market. It has gone through decades of flat to falling values in the recent past. Buying gold now is much riskier than it was several decades ago.

If you want to join the mad rush to get some gold exposure, it might be safer to invest through Exchange Traded Funds rather than buying bullion.

Posted in: Investing • investing in gold | Post a Comment »