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Investor Psychology

These CDs are Fool's Gold

Gold-indexed certificates lose a lot of luster when you put them under the microscope.

Gold fever has spread to certificates of deposit. As the yellow metal hits new highs, many banks are offering CDs that are tied to the price of gold. The pitch is seductive: Share in the rising value of gold and, if the commodity tanks, you'll get your principal back and maybe even a little interest.

But gold-indexed CDs are complex. The terms of the CDs vary widely, depending on interest rates and the price of gold at the time the certificate is issued. Each CD has its own formula for calculating the rate, and each has different rules on whether you may sell the CD before it matures. And if gold appreciates too much, you may have to settle for a puny yield -- or none at all.

To get an idea of how these critters work, consider a gold-indexed CD from SunTrust Bank. When the five-year CD was issued in October, gold was priced at $1,000 per ounce. Returns are calculated at six-month intervals: If gold rises to $1,900 per ounce or less over the five-year term, holders of the CDs earn the price gain, up to an annualized 13.7% return. If gold falls below $1,000 per ounce or rises above $1,900 per ounce during the period -- not just at maturity -- CD holders earn an annualized 2.3% return. That compares with a recent 2.9% annual yield, on average, on a conventional five-year CD. M Major issuers of gold-indexed CDs include big banks, such as Barclays, JPMorgan and SunTrust. The CDs typically come in three- to five-year maturities, with $1,000 minimums, and are insured by the Federal Deposit Insurance Corp. up to $250,000 per account.

"Indexed CDs are often linked to the investment du jour," says Greg McBride, senior analyst at With gold on a tear (up 36% for 2009 through December 4), banks are issuing even more gold-indexed CDs. But there are better and simpler ways to put gold in your portfolio.