Gold: Where Some Investors Go When the Economy Turns Gray

By Jack N., Communications Analyst and Blog Contributor

Gold was good to me in October of 1980. That’s when I sold my high school class ring for $85 to finance a camping trip to the Great Smoky Mountain National Park. Talk about a nice return on my investment. I had purchased the ring five years earlier for just $35.

As it turns out, I benefited from what makes gold attractive to traders and investors: It's a hedge against currency inflation and corporate deflation. From 1977 to 1980, inflation was rising, the economy was slumping, and gold traders sprung up everywhere. When I sold my ring, gold was trading for about $660 an ounce, compared to $150 an ounce just three years earlier.

Gold has rebounded again, soaring from about $300 an ounce in 2002 to more than $1,750 today. So what’s going on?

One reason is that gold is easier to acquire thanks to exchange-traded funds (ETFs) that buy gold. Fortunately, you don’t have to sell your high school ring to benefit. And there’s no need to store gold coins or bars in a bank safe deposit box. The SPDR Gold Shares Trust ETF (GLD) is the second largest exchange-traded fund in the world with more than $75 billion in assets. It’s also typically among the highest-traded ETFs among Scottrade clients, indicating that short-term traders are finding opportunities in gold, too. Other gold ETFs include iShares COMEX Gold Trust (IAU), ETFS Swiss Gold Shares (SGOL) and PowerShares DB Gold Fund (GBL).

I think the rise in gold also comes down to fear. Gold prices have risen right along with the huge rise in the federal deficit. Macroeconomics suggests that such debt can only be conquered by severe austerity or printing more money. The former could bring economic Armageddon, the latter could lead to persistent inflation. Either way, nothing makes gold buyers happier than a really great financial meltdown.

So where do you stand on the future of the economy? The correct answer to that could very well tell you where gold is headed.

In Scottrade’s 2012 American Investor Survey, gold was identified by both traders and investors as one of the top sectors likely to perform well over the next 12 months. What do you think will happen with gold prices over the next 12 months? Are you holding or trading gold now?

Jack N. is a communications analyst in the public relations department at Scottrade. He works to demystify the markets and the economy for all types of investors and traders.

Also of Interest:

• Investing in Gold Without Overhead
  
• Protect Your Portfolio Against Inflation
  

Articles, commentary, and opinions expressed on this site are those of the author and not necessarily those of Scottrade. Scottrade does not guarantee the accuracy of, or endorse, the views or opinions of the author.

The examples and/or strategies described in this blog are for informational purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.

Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund (ETF) carefully before investing. Leveraged and Inverse ETFs may not be suitable for all investors and may increase exposure to volatility through the use of leverage, short sales of securities, derivatives and other complex investment strategies. These funds’ performance will likely be significantly different than their benchmark over periods of more than one day, and their performance over time may in fact trend opposite of their benchmark. Investors should monitor these holdings, consistent with their strategies, as frequently as daily. A prospectus contains this and other information about the ETF and should be obtained from the issuer. The prospectus should be read carefully before investing.

Commodities, such as gold, involve unique risks and are subject sudden price fluctuations. Please research each investment carefully before investing.