Over the years, my experience with gold has been extremely limited. Except for the gold wedding band I've worn for 21 years, my only significant encounter with the precious metal occurred in the late 1990s, when my husband and I received an insured package in the mail that contained two gold coins.
My father-in-law had sent us the coins as his contribution to our son's college fund. The gold coins, which were each protected in a thin plastic case, were shiny and beautifully engraved.
But what I found most amazing about these diminutive coins was how they had killed off my father-in-law's enthusiasm for gold. The coins weren't numismatic marvels; they were mutts. In fact, when I learned how much my father-in-law had paid for the coins and what they were now worth, I was stunned. After calling rare coin dealers, I unloaded the gift and sunk the proceeds into a mutual fund.
I recalled my brief brush with gold because of what's been happening to the precious metal lately. Gold hit a 25-year peak a few days ago. In just the final week of March, gold-oriented mutual funds soared 9.99 percent.
Inevitably, the phenomenal performance has attracted the attention of many of the nation's most incompetent investors. These are the folks who only start salivating about an investment when there's a good chance - unbeknownst to them - that they will lose money. When the hot investment they are chasing inevitably hits a pothole, these investors will quickly leave the scene and steer their tattered portfolio to the next "winner." There's a term for this sad behavior: "Buy high and sell low."
With Wall Street now crawling with gold bugs, it's important that you understand a bit of history about gold investments before you contemplate joining them.
It's easy to trace the precious metal's footprints by looking at statistics compiled by Kenneth R. French, a professor of finance at Dartmouth College, who is at the top of the academic food chain of business school academics. French's performance figures for precious metal stocks date to July 1963. From that period to the end of 2004, these stocks generated a yearly return of 9.21 percent. In comparison, the blue chips in the Standard & Poor's 500 Index and long-term U.S. Treasuries returned 10.74 percent and 7.53 percent annually. So, congratulations gold. You've proven you can play with the big boys.
But these long-term figures hide some irritating traits. Gold can behave like a balky child, who won't budge from the grocery checkout aisle until you buy her a box of Skittles. In fact, this asset class can exasperate investors for much longer than a forgotten temper tantrum.