Gold has dropped to prices not seen since March 2010 – $1,088 a troy ounce. It’s due to a major sell-off in Asia today. The massive gold dump is likely due to beliefs that the Federal Reserve will hike interest rates. Rates haven’t risen since June 2006.
It’s hard to say exactly how the market will react to another rate hike. Back in 2006, most sectors stayed flat after the hike. The only sector to see a gain post-rate hike was the energy sector at 2 percent.
What does this mean for the average investor? Gold has been a post-2008 recession favorite. It’s easy to see why. In October 2008, gold was worth $805.29. By August 2011, gold had become worth $1,921.73. Yes, the price-per-ounce of gold more than doubled in just a few years. Meanwhile, the S&P 500 remained largely unchanged during the same period.
During this time, gold became the ‘it’ investment. Cash-for-Gold businesses began popping up all over America. Pawn shops began buying notable jewelry just to melt it down. Traveling gold dealers would visit small towns and place ads in newspapers, “We’ll take your broken, unwanted jewelry and turn it into cash!”
However, gold cannot stay a favorite forever. After all, its long-term return for an investor is pretty sorry. Let’s look at the facts. In Stocks for the Long Run, Jeremy Siegel’s most notable work, he discovered what a dollar invested in 1802 would look like in 1994 . If a person were to have invested $1 in gold in 1802, in 1994 it would be worth…. 98 cents.
Alternatively, should that person have invested in stocks, their dollar would be worth $599,605. Yes, stocks beat gold in the long run.
Gold’s recent decline should come as no surprise. It’s a market correction. Gold has been hyped for way too long. Alternatively, many speculators believe stocks will soon readjust as well. However, historically, stocks will remain the stronger investment.
After gold’s drop from its perch today, the dollar has been gaining strength. The dollar has surged about 21 percent over other major currencies such as the yen and the euro. FYI now is a great time to travel abroad for this reason. As an American, your overseas buying power has now increased.
“Should I sell my gold and reinvest in something else?” It’s a tough call. No one can predict the future. Even today, the gold market recovered slightly before close. It will likely rise even more. But if the past is any indication of the future, it would be best to sell once you have equities picked out. Visit the Saving Advice Forums to ask other successful investors what they recommend. Alternatively, one could always take the money out and ‘invest’ in the US dollar: ie hold onto cash. That may be a better investment than anything right now.
Looking to the past, gold will keep falling until it settles back down to a normal rate of return. The dollar will rise but will readjust as well. Stocks are usually the real golden ticket.
Keep an eye on the Fed. Rates haven’t risen in nearly a decade. When that happens, gold, the dollar, and stocks will all be in more major price drops, price spikes, or stagnation. Stay tuned.
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