What is investment risk? Risk can be defined as the cost of being wrong in evaluating an investment outcome. You can further define risk as knowing and understanding the expected outcome from the investment of your funds.
You are looking for a positive return of investment (ROI) rather than taking a capital loss of your investment. You want to protect your capital.
One of the questions that you want to consider is; How soon do you need the capital from your investment? Do you need to generate income for a time period under 5 years? Then your goal should be the consideration of the protection of your principal capital. Instead of considering gold as an investment, you should put the capital in cash money market funds, CD’s, or short term US Treasury bills and notes.
Investing in gold contains considerable volatility risks. Another thing to consider is that gold does not pay you dividend income.
You can take steps to protect yourself against the volatility risks. You should never have a high percentage of your portfolio invested in gold. Many financial experts recommend that you should start out with only 5% or less of portfolio invested in gold. You should however, utilize dollar cost averaging into purchasing additional shares of gold. Your dollar cost averaging strategy should continue on a regular schedule period. Once you reach your assigned percentage of gold exposure to your portfolio then you can cancel the rest of the dollar cost averaging additional share purchase.
You also want to study the history of gold prices and it’s relationship to the macro-economic cycle, as well as the rise and fall of the United States stock market. Historically any time that the United States stock market and the US currency market declines, the price of gold will increase. You also want to keep a weary eye on the performance of real interest rates in the United States. As a rule of thumb so long as the interest rate environment remains below 3%, gold prices tend to rise. Gold prices also historically rises with the risks of international conflict and crisis as well as uncertainty.
The most recent price for gold as of January 11, 2011 was $1,384.20. The 52 week high for gold price is $1,432.50 as of December 7, 2010. The 52 week low for gold price was $1,050.30 as of February 5, 2010.
Another risk to consider is the recent high price of gold in December 2010. Is there still room for a new investor to show a capital gain in the gold market? Who knows?
You can hedge your risks by dollar cost averaging into your gold investment.