Investors learn the hard way precious metals can be risky

By Matt Krantz, USA TODAYPosted 20h 21m ago |

Q: Isn't it safer to invest in something tangible, like gold or silver, than to buy paper assets like stocks and bonds?

A: Paper assets, like stocks, bonds and currency, are getting a bad name with some investors. Fears about future inflation and a weak dollar are at a fever pitch, prompting some worried investors to think the only investments worth anything are ones you can touch, see or pour into your gas tank.

But there's a growing danger that investors are wading into this area of commodity investing with incorrect expectations fanned by common misconceptions.

Your question gets at one of the top misconceptions some have about commodities, especially precious metals like gold and silver. Since you can feel and touch physical gold and silver, there's a temptation to somehow think they're safer than financial instruments such as stocks and bonds. Some investors think that if they can hold a bar of silver or gold, there's no way to lose money on that investment.

But recent market events have proven that way of thinking to be very wrong. Silver is a classic example. Investors poured into the metal, pushing the price of the metal up 57% in 2011 before a massive correction started on May 2, 2011. Investors bought up the metal thinking it was a no-lose proposition owning a hard asset.

STORY: Ways to profit if a gold bubble is forming
STORY: Which is smarter: Debt reduction or investing in gold?
MORE: Ask Matt column index

But those investors were served up one of the most vicious and rapid reversals in recent memory. Tighter trading restrictions kicked off a downward spiral in the price of silver that pushed the price of the metal down 25% in just four trading days through May 7, 2011. That means in just four days, the metal plunged into a bear market.

Ask Matt about stocks

USA TODAY financial markets reporter Matt Krantz answers a new question every weekday at money.usatoday.com.

Got a question about the stock market or a specific stock? Click here to ask Matt your question.
Read previous Ask Matt columns
Need a way to track your stocks or funds? Click here to set up a free portfolio at USATODAY.com

Sign up for USA TODAY's free Personal Finance e-mail newsletter. Every Friday, get a week's worth of USA TODAY's personal finance news and columns. Sign up now. It's free.

Recent events are a harsh reminder that hard assets, especially silver, can have vicious price action. While you may have the security of holding a silver coin in your hands, remember that the price of that metal can fall dramatically with little warning.

Paper assets including stocks and bonds also see their prices swing up and down. But the price volatility of bonds has been much lower than gold over time. Meanwhile, stocks have generated much higher returns than gold over the long term.

The bottom line is that if you're going to invest in precious metals, don't make the mistake thinking you can't lose money. You can lose money on gold just as easily, if not more easily, than you can on paper investments like bonds and stocks.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz

http://www.usatoday.com/money/perfi/col ... onds_n.htm