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Financial advisers warn gold may be at a bubble level

ORLANDO — At least one-third of Kimberly Sterling's clients have sought her advice in the past year about investing in gold. The Orlando financial planner has successfully discouraged all but one of them from doing so.

That one investor insisted on having some gold in his portfolio, she said, despite her warnings. Eventually, she referred him to a gold commodities exchange-traded fund that has done well during the metal's decadelong run-up in price. But her firm, Resource Consulting Group, still wouldn't buy in; it would only make the referral.

"Our bottom line is this: Gold is a bubble now, and it is too late to get in," she said. "It is like someone who bought real estate in 2006, at the height of that bubble. You could get hurt really badly."

Anyone who did invest in gold 10 years ago has done well: The per-ounce spot price of gold has risen more than 300 percent over that time, hitting a record $1,226.56 in December.

Whether or not prices have peaked, gold's record run has convinced some mainstream financial advisers that, at the very least, they need to have a sound strategy for investors who demand having gold in a diversified portfolio.

Billions of dollars have flowed into gold investments in recent years — including mutual funds, exchange-traded funds, futures contracts, even gold coins and bars — as investors have ridden the ever-rising price wave. Exchange-traded funds, or ETFs, have been especially attractive because they can be actively traded during the day (unlike mutual funds) and are responsive to the changing price of gold.

Jitters over the economy, the dollar and the federal budget deficit have fueled the trend; gold's value as a hedge against inflation — long subdued but thought by some to be lurking about — is also playing a role.

"Gold is one of those things that pops up in times when there's uncertainty and crisis," Sterling said. "But when it pops, it is too late to get in."

Financial planner Al Baker said he has been a believer in gold for a decade now.

Although gold has been only flirting for months now with December's record high, Baker expects it to continue rising.

"I disagree that this is a bubble we're seeing now," said Baker, chief investment officer for Resource Group of Winter Park. "Bubbles only last a short period of time, a couple of years at most, while a trend builds upon itself and goes higher over time — 10 years in this case."

But even some advisers who acknowledge being gold "converts" are wary of investing in the metal right now.

Cary Carbonaro said she began directing clients several years ago to invest about 2 to 5 percent of their portfolio in a gold exchange-traded fund that has since doubled in value.

"It was great to get in about three or four years ago, but now you have to be much more cautious," said Carbonaro, a financial planner in Stonegate Wealth Management's Clermont office.

"And there are better options," she added. "Now we use a well-rounded, natural resources fund that includes a lot of commodities — much better than investing in just gold."

Naysayers such as Sterling, the Orlando planner, insist that the best course is to forget about gold for now and stick with blue-chip stocks and bonds in a well-balanced portfolio.

She said that advice has paid off for her clients: Since the stock market hit bottom a year ago, the S&P 500 index has risen nearly 70 percent, compared with a 22 percent increase in the price of gold. She also noted that, since 1980, the S&P 500 has outperformed gold by a 10-to-1 ratio.

"There are obviously some periods where you could have made a killing (in gold) if you timed it just right at the beginning of the bubble and got out at the top," she said.

All that glitters

Caution is the watchword these days for anybody interested in gold as an investment.

Costs and credibility: Much is being made of buying the metal itself, as coins or bars, but that involves potentially significant costs and risks. Check out any company making such a pitch, starting with the Better Business Bureau's national Web site, bbb.org. And consider the costs of shipping and storing such gold.

Indirect ownership: If you really have "gold fever," consider diversified precious metal and commodities mutual funds that include gold in their holdings. Even then, beware of fund fees and buy-in minimums, or "loads." There are plenty of high-performing "no-load" funds with expense ratios of 1 percent or less.

Verify, verify: Beware of financial advisers who promote gold — or any investment, for that matter — with claims of "guaranteed" and "risk-free" returns that sound too good to be true. Gold-related fraud is popping up across the country; regulators in Maine and Nevada, for example, recently filed cases against various individuals.

Financial advisers warn gold may be at a bubble level 04/10/10 [Last modified: Friday, April 9, 2010 7:26pm]
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