3 rules for buying gold

3 rules for buying gold
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Humans are pack animals. We tend to go with the herd more often than not — even if we think we’re marching to the beat of our own drummer. Gold is just the latest example of that if you judge by the cheesy ads on late-night TV promising that it’s a get rich quick play.

The truth is, gold is not really an investment; it’s more of a speculative venture.

For those who took economics in college, you may recall the Dutch Tulip Mania from 400 years ago when people speculatively bid up the price of tulip bulbs in the Netherlands, which they thought would appreciate sky high. Unfortunately, generations of wealth got wiped out when the bubble burst.

Yet the lesson is never learned and manias continue to happen in so many ways. In the late 1990s, it was the tech stocks. The “this time is different” mentality drove people who had resisted other manias to sink their hard-earned cash into the overvalued tech sector.

The NASDAQ (an index of mostly tech stocks) first topped 5,000 in March 2000. But the market would soon collapse. It didn’t complete the long, arduous climb back to 5,000 for another 15 years.

Today, the NASDAQ has since hit another milestone — crossing the 6,000 threshold in April 2017. But the point is you never want to buy in at the peak of a mania because there’s too much potential downside risk.

Remember the old maxim about buying low and selling high? You likely wouldn’t be doing that with gold at today’s prices.

Conventional wisdom says that with a recovering economy, interest rates beginning to rise again and the dollar gaining strength against other world currencies, the outlook for gold prices isn’t too rosy.

That’s because gold trades on fear. Clearly the stock markets are at all-time highs reflecting investor confidence, not investor concern.

That said, public interest in gold dies hard.

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Follow this advice if you want to buy gold

If you’ve got gold on your mind, here’s what money expert Clark Howard wants you to know…

Stick to the 5% to 10% rule

The consumer champ is not opposed to having a small percent of your portfolio in gold, on the order of 5% to 10% of your overall portfolio.

But to take everything you’ve got and dump it into gold is to be a speculator — and that’s something Clark never encourages.

Don’t physically hold the gold you buy

Buying actual bars of gold is not recommended. Why? Storage can be cumbersome and there’s a huge spread on the buy and the sell. That’s why Clark’s preferred way for you to own gold is through a gold exchange-traded fund (ETF).

Buy through an ETF

ETFs are the fastest growing area of investing, and the penny-pincher likes to call them “a mutual fund for the next era.” You buy ETFs exactly like you would a stock —  preferably through a zero-commission broker — and you can sell them at any time.

With a gold ETF, you let the fund store the physical bars of gold at minimal cost to you. And then you can buy and sell at will, without worrying about getting clobbered on the spread. Below are some ETFs that let you invest in gold or precious metals.

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