Saturday, April 22, 2006

Gold and Silver: Pass the Pepto-Bismol

The commodities market has been on a tear as of late. In fact, Vanguard's Precious Metals and Mining Fund (VGPMX) has returned > 60% in 1 year! It has been so successful that the fund closed in early February 2006 to limit asset bloat. Gold prices were in the headlines earlier this week as the price went over $600 per ounce. Is it time to invest in these precious metals?

Commodities are known for their volatility and this was demonstrated a few days ago when Gold dropped 2% in one day, sliver dropped 14% in one day! Many experts feel that gold still has plenty of room to go higher as downward trend for the dollar is anticipated over the long-term. Some may ask themselves, how can you just sit this out while people invested in the sector are getting red-hot returns? Personally, I cannot tolerate such volatility. Most investors are irrational investors to what are perceived to be rational markets and tend to invest when prices are high and sell when prices are low. So as gold continues to push higher, there will undoubtedly be a greater influx of investor money into it. Returns may continue to be strong but it may be another case of joining the party too late. Once again, appropriate diversification and dollar-cost-averaging is an easy way to protect against our own irrational behavior when it comes to investing.

Although $600 seems very high, if adjusted for inflation, gold will have to be >$2000 to reach the highs it had in the 1980s. Invest in precious metals in 2006 and enjoy the wild ride? No thanks, I'll pass on the pepto-bismol and the darkened bowel movements that result from it.
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