A brief chart to illustrate that gold is not the stable investment some claim:

[Zynx]

That said, precious metals should occupy a small place in a diversified portfolio, just not a dominant one. They can help to provide a hedge if kept to about 5% and at a maximum 10% of your non-home financial assets. However, like any financial instrument, gold is not truly stable. There are no real long term trends and price swings can be violent. No one can look at the spike of the last five years and tell me or anyone else that is justified. The stock market, which everyone lambasts for its volatility doesn't triple in five years even in bubble times, unless you look at the NASDAQ from 1995-2000, but that's too narrow of a measure.

In any case, just be prudent. I can't stress that enough. I know there is a feeling of safety and security in gold, but remember that it has fallen $150 an ounce from its most recent highs just 3 weeks ago and that is not all that unusual.

Disclaimer: Just for total disclosure, I own a valuable gold coin that I bought when gold was at $550 and own significant amounts of silver once again in coin form. That is more incidental to the fact that most historical coins I like tend to be silver. However, the value of these metals represents only 2.5% of my assets.

[Clear Blue Sky]

1. Diversification is the key...

[Zynx]

8. It sure is.

People need to be spread out among asset classes to minimize risk.

[lumberjack_jeff]

2. Gold has risen lately for the same reason oil has

largely because the dollar is dropping.

An ounce of gold still buys about the same amount of gasoline as it did 10 years ago. The value of gold isn't that it's stable, it is that of an inflation hedge.

[JDPriestly]

4. Exactly. That is why it should not dominate a portfolio.

It is a hedge.

[Zynx]

11. Some people fail to recognize this concept.

[Mike03]

17. Who says it should "Dominate" a portfolio? I haven't heard anyone

advocate that. It is part of a portfolio, just as the Euro is, and commodities, fixed income/high yields, money market sweeps, industrials, infrastructure, and perhaps selected emerging markets should be.

[Zynx]

19. I've heard gold bugs say it should be up to a quarter of your financial assets.

Also, buying in at all at these levels is nothing short of madness.

I would sooner advocate someone going into Indian banks which are down 40% from their 52-week highs than go into gold.

[ThomWV]

3. I carry a $10 Gold piece in my wallet

I carry a $10 Gold piece in my wallet, '08 with motto. I believe gold was round $360 when I got it.

[Zynx]

7. I intend to buy some more gold coins when the price comes down a bit.

I think gold is still in a speculative frenzy period so I am staying put.

[Mojorabbit]

5. I bought my gold

when it was a third of what it is now. Much better return than any of my other investments.

[Zynx]

6. That's fine and it does not contradict anything I said.

People should recognize that such returns are not typical or they will end up like equity investors who bought some stocks that went up 10,000% in 1998-2000 and then saw them drop 99%.

[pitohui]

9. nice post

i bought my precious metals many years ago and not in a quantity that would do me harm, they are called an inflation hedge but i don't think they really hedge that much

it's a frustrating investment that doesn't really grow, real example, i bought a 1 oz. coin when gold was around $260 an ounce, now it's what? around $1,100 an ounce? but if i were to sell the coin and pay the taxes, then i don't really come out ahead on buying power because inflation has been so high

[Zynx]

10. Generally, most asset classes outperform precious metals.

In any given year, precious metals are not a good place to be. I think there is a place for them, but not a large one.

[Mike03]

13. Not "most." You have to use your head and avoid certain sectors. NT

[Zynx]

14. In any given year, precious metals are not a good place to be. They have their day in the sun

once in a while and that's why there should be a place for them, albeit a limited one, in a portfolio.

[Mike03]

15. I agree about a "limited place." You'll get no argument from me.

For conservative investors, 5% to 7%. For investors who are more bullish on gold, I would go to 10% or 12%.

[Zynx]

18. If someone was at 10-12% right now I would tell them they are out of their minds.

Just as after a bull run in stocks you should cut them to below 50% of your portfolio and increase bonds, after the obscene run gold and other commodities have they should constitute no more than 5% of your portfolio.

[Mike03]

12. That chart is common knowledge to anyone who invests in gold.

The idea is to analyze the falling dollar, rising petroleum, and purchase at the right point, and then to sell when you've got reasonable profits, and not get greedy.

Why are you so obsessed with defending the idea that gold is poor investment when it has obviously been a great investment for anyone who knows how to correlate gold's worth with dollar weakness and petroleum strength?

Don't you have some more worthy battles to fight? You're not a dumb person.

[Zynx]

16. My concern is the legions of unsophisticated investors lured in by gold blogs and

the Monex ads on T.V. who do not understand the history or the nature of that market.

If you're a skilled speculator, you can certainly make money in gold, but my point is that the past five years have been unusually favorable to gold and the volatility is going to be intense going forward.

I am making my stand on this argument because I know that there are people who run from bubble to bubble and ruin themselves in the process. Gold and commodities in general right now are a bubble. There is no question about that. I am as certain of this as I was of the housing bubble. You can look up my posts two and three years ago on housing if you wish. Many people have rushed in without the knowledge that the tried and true speculators have.

[Mike03]

20. Maybe you are doing some folks here a favor. Can't argue with that.

I would not advocate people buying gold bullion or anything extreme like that. But there are sound ETFs and some good mining stocks that might round out a portfolio.

You make good points. I would never want anyone here to get in too deep into the dazzling temptation of gold without having a stable portfolio balanced in other ways.

I agree... Your advice is worth listening to.

[Zynx]

21. Indeed. I have no problem with someone having a position in gold ETFs, just so

long as they don't chase the momentum. Gold is a hedge position only. Commodities in general are far too volatile to be a core position in a portfolio.

My concern is people look at gold rising 250% in five years and want to pile in now. We have seen what kind of volatility one can be subjected to in the past three weeks. If they want stability, have bank CDs. Contrary to what a lot of people are trying to say, banks are about as safe as you can get.

[Mike03]

22. Zynx, maybe you could give some advice to some of us about what you feel

is worth owning during this difficult, apparently bear market. You seem to know what you are talking about.

It is a very difficult market indeed, and any advice about how to avoid being damaged too badly by the severe oscillations, corrections and downturns would be helpful to a lot of us.

[Zynx]

23. I'm a bit more of a risk hound than most.

I've been buying bank stocks whenever they have a plunge for the past couple months, but I do not reccomend this to most people. Hell, I'm one of the speculators by doing that and while I've gotten some moves right, others I have not. This has been a challenging period.

If my primary concern was wealth preservation, I'd say intermediate, not long term, bonds should be the core position at this point. The yields aren't great, but there is interest rate risk on the long end if the economy does reaccelerate. I'd say 40% bonds split between international government and US Treasuries is not a bad idea at this point with 3-5 year maturities. For stocks, have 30% of your money in them with an even split between US and international indexes. The remaining 30% should be predominantly in cash until markets stabilize in short term CDs or money market, unless you are adventerous, and with a sprinkling of metals and commodities as a hedge. There are huge risks out there in terms of foreign currency oscillations so full blown international is not the world's best idea. European banks are struggling as well and also have to confront Spanish and English housing bubbles. We'll see what happens. If the U.S. and Europe simultaneously enter recession, the global markets in general will be whacked. As this will be the first downturn in modern history where the dollar is not dominant, I cannot say what will happen regarding foreign currencies.

I could go into a bit more detail regarding allocating the international portions, but I think that is sufficient for now. This allocation will not make you very much money, but at least you won't lose much. As of now the primary concern is wealth preservation.