Should You Invest in All That Glitters?

Physician's Money Digest, January31 2004, Volume 11, Issue 2

In the past, gold has been unaffected by downswings in the market and was seen as an uncorrelated asset. Gold's apparent disconnect from stocks made it a solid investment unlikely to be affected by the fate of the market. But, according to a report in Forbes, gold may be entering the market mainstream.

The price of gold has risen by 130% since February 2000 compared with the S&P 500's return of 11% and the Nasdaq's decline of 45%. The gold bullion exchange-traded fund StreetTracks Gold Shares has increased to $10 billion in the previous 2 years, trading at $66 a share. However, in Winter 2006, Gold fell by $23 an ounce after a drop in the Shanghai stock market and continued to have what seemed to be a connected response to the market. Should gold investors be worried that gold will no longer be a safe and separate asset? James Grant, editor of Grant's Interest Rate Observer, says that the short-term risk for such a connection lies with those investors quick to sell when stock prices drop, but the long-term rewards may just cause an extended bull run for gold.