by Archie M. Richards, Jr., CFP^®
February 27, 2006

If you've been speculating in gold, sell it.

Oh, it's all right to hold a small portion in gold or gold stocks because their price trends differ from those of other investment sectors. I don't recommend doing this myself, but it's a valid long-term strategy.

But holding gold for speculation? Not now. Get rid of it.

Here's why: A company offering gold coins is a frequent advertiser on a popular radio talk show. The other day, the host said that he himself had bought gold and made a gain last year of 20 percent.

No one blames the host for encouraging the purchase of his advertiser's products. But the advice will probably be wrong. Maybe not right away, of course. But time and again, investments that have attracted attention because they've gone up should be avoided.

The key phrase is not "because they've gone up." Lots of investments do that. If no one notices, go ahead and buy.

The key phrase is "attracted attention." If an investment's rising price attracts public interest, the next major move is likely to be down.

Those who buy investments when positive attention is focused on them are generally inexperienced investors who are usually wrong. Seasoned investors are more inclined to buy lower, when the item is out of favor.

To find out what investments have attracted attention, check headlines. Newspaper and magazine editors keep their ears to the ground to determine what the public thinks. To attract readers, they write headlines appealing to those views. If headlines frequently refer to the price of an investment having risen, inexperienced investors are probably buying it. You should stay away.

Another group that knows what the public thinks is advertisers (and talk show hosts). Ads have no effect unless they strike a chord with the public. Advertisements containing testimony about a price having risen mean that the investment has appeal for investors who are usually wrong. You should therefore avoid it.

Remember the ads of mutual funds back in 1998 and 1999? "We're making a ton of money in tech stocks," they proclaimed. "Pile on board and join the party!"

Some party. Those who bought high-tech at that time lost their shirts.

The recent radio ad for gold also cited reasons why gold should be bought (other than the price having risen). Here they are - all faulty reasons:

• Federal deficit: In terms of the entire economy, the deficit has been getting smaller and smaller. Twenty years ago, it was 6 percent of the Gross Domestic Product. Now, it's only 3.2 percent. America has run a federal deficit almost every year since John the Baptist. Despite this, we've been doing just fine, thank you.

• Trade deficit: Yes, Americans are buying lots of foreign products. But foreigners are investing some of their dollars back in the U.S., creating American jobs. When undeveloped nations become wealthy enough to buy American products in quantity, the trade deficit will turn into a surplus.

• Weak dollar: The ups and downs of currency values make a difference to those who engage in international trade, but they never seem to make a difference to the U.S. economy as a whole. Besides, the dollar has lately been performing well.

• Higher inflation: The Federal Reserve's job is to control inflation. At times in the past, it's done a poor job, but not in the last 25 years. Lately, the Fed has raised short-term interest rates specifically to control inflation. There's a lag time before the policy has full effect, but the effort will not fail. Besides, the inflation rate isn't all that bad - something like 3.75 percent, down from 14 percent 25 years ago.

In addition, mark my words: The oncoming wave of new high-tech will enable the production of such a worldwide flood of goods that prices will go down, not up.

With gold priced at $561 an ounce, don't acquire it now as a short-term speculation. If you already hold it for that purpose, sell. The rising price has attracted too much attention.