Gold Boom: Wary of Markets, Retirement Savers Seek Hope in Gold

Critics warn of relying heavily on a metal vulnerable to speculation.

May 17, 2010 — -- Tommy Griffiths hosted a popular radio show in Virginia Beach for twenty years.

During the boom he watched his house soar in value and his retirement savings grow. But when the economy crashed, Griffiths, 49, lost his job and had to tap his 401K to keep up with the bills.

Now, he has figured out a better way to save for his retirement nest-egg: he's trading gold.

Griffiths, who is married with one son, is reluctant to say how much in profit he has made so far, but says it's enough to cover his needs.

"I took a risk and it worked out," says Griffiths, who buys and sells gold bullion on eBay."I'm going to be a little more wary of investing in a 401K and I'm absolutely keeping an eye on gold."

Gold Gains Sparks Activity

The price of gold set another record high this month, hitting $1,249.70 per ounce at one point on May 6. It's a far cry from the lows of 1999, when an ounce cost less than $300.

The boom has fueled all kinds of business activity, from "gold parties" at which friends sell their unwanted baubles to professional gold buyers, all the way to amateur gold trading, such as that practiced by Griffiths.

But there has also been a surge in average investors -- including retirees and those saving for retirement -- who are loading up on gold as a way to hedge against inflation and stock and bond market fluctuations.

"Retail investors are buying gold through the ETF (Exchange-Traded Fund) and through ordinary coins and small bars," says Jim Steel, commodities analyst at HSBC Securities. He points out that gold ETFs are particularly popular, since they allow investors to buy a share in actual gold bullion, without having to deal with the hassle of storage and insurance.

However, some experts warn against relying too heavily on gold as an investment, pointing out that its fluctuations are unpredictable and that it usually only gains value when everything else sinks.

At the same time, because of its appeal as an "investment of last resort," gold is very vulnerable to the sharp ups and downs caused by speculators, says Jon Nadler, senior analyst at KITCO Metal, a Canadian retailer of precious metals.

Gold May Disappoint

"Gold is not an investment which makes money," says Nadler. "It's a money preserver."

Nadler points out that adjusted for inflation, the value of gold has actually dropped since its last boom in the 1980s. He says an investor who bought gold in 1980 would not break even, after inflation, until gold hits $2,300. The S&P 500 Index, meawhile, has more than tripled on an inflation-adjusted basis in that same period.

"People running out there thinking this is the next dot-com or the next condo in Florida, that's exactly what they're going to get: disappointment eventually," says Nadler. He does, however, recommend holding a small portion of one's portfolio, up to six percent, in gold as a diversifier.

Robert Schmansky, a financial planner at Northern Financial Advisors, agrees.

"My biggest concern is when the gold bubble eventually pops it will be felt as much as any other market bubble," he says. "I'm not sure we are closing in on that point, but no one will be able to time the top, and many ride their gold holdings down before selling. What seemed like a great idea at the time, doesn't guarantee results."

He points out that many retirees forget that they have "real asset" inflation in their real estate and home equity.

"Adding gold will have diversification benefits, but over the long run, its value is not as significant as it seems in the present," he says.

Tommy Griffiths, meanwhile, plans to stay in the market as long as it seems profitable.

"Clearly my retirement strategy is to find a job," he says, "but I'm going to keep buying and selling gold."