Gold. You can't eat it. It doesn't pay interest or dividends. In fact, it costs money to keep it and insure it.
Even then, if you buy it by the bar, you probably won't even see it. Instead, you'll be issued a certificate telling you that you're the proud owner o a certain amount of the metal that is being stored at a registered depository.
But investor interest in gold is climbing as the price of the metal soars. For the first time in history, gold is selling for more than $300 an ounce, and if inflation continues to buffet the world, analysts predict that the price of gold will continue to rise.
Although gold has grabbed man's passions throughout history -- and for a long time served as the core of the international monetary system -- investors should be cautious.
For gold is a commodity whose price can fluctuate. And unlike a stock or bond, which pay dividends or interest whether its price is rising or falling, gold yields the investor a return only when he or she sells it.
The investor who bought gold six months ago would be positively gleeful today. The price of gold has climed about $50 in the past six months and about $100 in the past year.
But if that investor had purchased gold in late 1974 -- on the eve of an American law that allowed U.S. citizens to own gold for the first time in decades -- he or she would have been distraught. For the first time in decades -- he or she would have been distraught. For instead of climbing in price because of the influx of new U.S. purchaser as mosh predicted it would, the price of gold plummeted instead, dipping to $103 an ounce by late 1975.
"Most brokerage houses recommend that gold never constitute more that 10 to 15 percent of an investor's portfolio," according to Jacques Luben of Merrill Lynch, Pierce, Fenner & Smith.
For the investor who wants to take his or her chances with gold -- and analysts say that over the long run inflation and the declining dollar will make the metal a more attractive investment than most -- there are a variety of ways to get in the market.
In nearly all cases, the investor pays a preminum of some sort to purchase physical quantities of gold (plus delivery or storage charges) and pays a brokerage commission on paper transactions in the metal.
Gold coins and small gold bars. If you don't have the $30,000 or so that it takes to buy a 100-ounce gold bar, coins that are nearly pure gold or small (1 ounce or less) gold bars are an alternative. Furthermore, if you want to fondle your holdings, it's easier to take delivery of these smaller pieces. Also, many purchasers may demand to have a gold bar assayed before they will by it, while such constraints aren't put on the coins.
The coins have a further advantage of being divisible. You might buy 10, then decide to sell five.
The most popular of the gold coins is the South African Krugerrand, which contains an ounce of the metal. But because of its popularity, the Krugerrand sells at a higher premium to its intrinsic gold content than other coins.
George Parola, an assistant vice president of Deak, Perrara, noted that the Krugerrand sells at a premium of 4.66 percent over the value of the gold it contains. Other coins, such as Austrian 100-kroner coin (which contains 0.9802 ounces of gold), sell for a much smaller premium.
For example, Parola said, on a day when Deak was quoting the Krugerrand at $320 a coin (if bought in lots of between 10 and 49), the Austrian coin cost $306. To get roughly the same amount of gold (98 ounces), an investor would buy 98 Krugerrands or 100 Austrian coins.
The investor would pay $31,360 if he bought his gold through Krugerrands and $30,600 if he bought Austrian kroners, a savings of $760.
Gold bars. For the investor with bit more spare cash, the larger gold bar is an investment opportunity. These bars usually come in one-kilogram (32.-15-ounce), 50-ounce and 100-ounce sizes. Typically the investor doesn't take physical possession (although he or she can), but instead is issued a certificate.
Generally, the investor buys the gold outside the country to avoid the sales tax (which in New York is 8 percent). Merrill Lynch usually sells investors gold held in London, while Deak generally sells gold held in Zurich. But there are gold depositories in this country as well -- many of them banks, but not all -- if the investor prefers to keep his holding within the confines of the U.S.
Investors must pay a storage and insurance charge on their gold bars -- and the price varies widely. The charge is usually some percentage of the sales price.
Gold futures. For the investor who wants to hedge against inflation but is not interested in owning gold physically, futures are an alternative. but like all commodi trading, gold futures are risky, and reputable brokerage houses will screen a potential investor carefully.
Most gold futures trading take place on the New York Commodities Exchange or Chicago's International Money Market Contracts are written in terms of 100 ounces of gold.
Merrill Lynch's Luben said the typical brokerage house allows an approved customer to buy a gold contract for $3,000. But the customer has to be ready to add to his $3,000 down payment if the price of gold moves against him.
The investor who thinks the price of gold will rall can buy a contract requiring him to deliver 100 ounces of gold at some future date, while an investor who thinks the price will rise can buy a contract that requires him to accept 100 ounces.
Take an example. The price of gold is $310 an ounce and you think it will fall. So you buy a $3,000 contract requiring you to deliver gold. But you're wrong. Your first day, the price of gold rises to $320, an ounce. On a 100 ounce contract, that means you've lost $1,000, so your original $3,000 investment is whittled to $2,000. Your broker will call and ask you to add $1,000 to your account.
If you're right, and gold falls to $305, then your account will be worth $3,500. Few investors buy gold futures and take delivery. Most contracts are sold out before their expiration date.
There are also gold options -- that like stock options give you the right to buy or sell gold at a specified price at a certain date -- but the market in the U.S. is small today.