Jack Bass, founder of investment advisory firm Jack A. Bass & Associates, wrote the book on gold, The Gold Investor's Handbook. Wondering whether gold is a winner among investment ideas, we talked to Jack about what you should consider before buying gold.
The basic rule is simple, according to Bass, who says, "It's always a good time to buy gold because you're offsetting the devaluation of the purchasing power of the U.S. dollar. From 1966 to today, it has dropped 86 percent. To counter that, you buy assets that are rising, like gold. Actually, gold outruns the fall in the U.S. dollar."
Bass predicts that gold, which sells around $1,700 an ounce today, will be over $2,000 an ounce by the end of 2013. "Anywhere from 10-40 percent of your portfolio should be in gold."
How To Invest in Gold
For the novice gold-investor, Bass recommends several ways of buying it, depending on your tolerance for risk. The most conservative choice is to simply buy U.S. gold coins directly from the mint. He adds a caution that if you buy gold bars or wafers from a gold dealer, be sure that dealer is reputable so you don't get stuck with gold-painted lead.
If you decide to own your gold, be sure to put it in a safe place, like a bank safe-deposit box. Bass cites the story of a fellow in his town who purchased $300,000 in silver, which he kept at his home, talked about it, and was robbed.
Another alternative is to buy an exchange traded fund or EFT, whose value will rise and fall with the price of gold. The largest one is GLD.
The third, and riskiest, choice is to buy stocks in the field. "Barrick is the world's largest gold miner, mining seven million ounces every year. On the other end of the scale are tiny exploration companies. There are lots of options in between," says Bass. Generally speaking, the smaller the company, the greater the risk – and the greater the potential reward.
Is Investing In Gold for You?
As you're casting about for the right investment ideas, consider this: "If you can't sleep at night thinking that the price could go down tomorrow, gold may not be for you, but then neither is the stock market," says Bass, adding that buying physical gold, the most conservative approach, may keep you sane.
One final caution: Buying gold objects, like jewelry, is not an investment – or at least not a good one. When you buy a gold locket or pendant, you're generally paying for the artisan who made it, as well as the wholesaler and retailer who sold it. Bass estimates that as little as 10% of the price you pay is actual gold. There's a much smaller markup when you buy investment gold, on the order of 1-5%.
Bass's book has much more detail on the ins and outs of investing in gold.