Quiz | August 2011

Gold: What You Need to Know

August 2011
By Bob Frick, Senior Editor

With the price of gold pushing into record territory and rising beyond $1,800 an ounce, you may be tempted to add some to your portfolio. Many investors already have. Sales of gold bullion and gold-backed exchange-traded funds have set records this year. Time to buy gold? Not so fast. Take our quiz to find out how much you really know about gold.

Quiz

Gold: What You Need to Know

Question 1 of 10

Since the beginning of 1980, which investment has generated the best returns?

A. Gold
B. Large-company U.S. stocks
C. U.S. bonds

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Quiz

Gold: What You Need to Know

Question 1 of 10

Since the beginning of 1980, which investment has generated the best returns?

You're right! B. Large-company U.S. stocks is correct.

Sorry, wrong! is incorrect.

The right answer is B. Large-company U.S. stocks.

The price of gold has risen from $559 an ounce to $1,776 (as of August 15, 2011), for an annualized return of 3.8%. But over the same period, Standard & Poor’s 500-stock index returned an annualized 11.0%, and Barclays Capital Aggregate Bond index gained an annualized 8.7%

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Gold: What You Need to Know

Question 2 of 10

Since the beginning of 1990, which investment has performed best?

A. Gold
B. Large-company U.S. stocks
C. U.S. bonds

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Quiz

Gold: What You Need to Know

Question 2 of 10

Since the beginning of 1990, which investment has performed best?

You're right! B. Large-company U.S. stocks is correct.

Sorry, wrong! is incorrect.

The right answer is B. Large-company U.S. stocks.

The S&P 500 has gained 8.1% annualized, and bonds have risen 7.1% annualized during the same period. Gold has risen 7.4% annualized. Note that the price of gold actually dropped between 1980 and 1990, from $559 an ounce to $400 an ounce. Gold often loses value in prosperous times, as the 1980s generally were.

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Gold: What You Need to Know

Question 3 of 10

Since the beginning of 2000, which investment has risen most?

A. Gold
B. Large-company U.S. stocks
C. U.S. bonds

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Quiz

Gold: What You Need to Know

Question 3 of 10

Since the beginning of 2000, which investment has risen most?

You're right! A. Gold is correct.

Sorry, wrong! is incorrect.

The right answer is A. Gold.

Gold wins this one with a powerful 19.0% annualized rise. But consider that gold had dropped to $282 an ounce at the start of this period from $559 in 1980 and $400 in 1990. Once again, gold’s price fell during a period of economic prosperity -- the 1990s. Bonds came in second during this period, with a 6.5% annualized return. Stocks came in last, with a tiny return of 0.1% annualized -- the victim of the bursting of two bubbles -- the tech bubble early in the decade and the real estate and credit bubbles starting around 2007.

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Quiz

Gold: What You Need to Know

Question 4 of 10

Gold is a dependable inflation hedge.

A. True
B. False

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Quiz

Gold: What You Need to Know

Question 4 of 10

Gold is a dependable inflation hedge.

You're right! B. False is correct.

Sorry, wrong! is incorrect.

The right answer is B. False.

The price of gold doesn't track inflation, as a general rule. In the 15 years from 1987 to 2001, as inflation fluctuated around 3% a year, the price of gold dropped. But it is true that during periods of extraordinarily high inflation, gold’s price may soar. That’s what happened from the mid 70s through the early 80s, when inflation crept from 4.8% in 1976 to 13.3% in 1979 and 12.4% in 1980, before beginning a long descent. The price of gold leapt from less than $150 an ounce to more than $800, then collapsed to $400 by 1981. Want a guaranteed inflation hedge? Try Treasury inflation-protected securities.

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Quiz

Gold: What You Need to Know

Question 5 of 10

Gold can be a good crisis hedge.

A. True
B. False

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Quiz

Gold: What You Need to Know

Question 5 of 10

Gold can be a good crisis hedge.

You're right! A. True is correct.

Sorry, wrong! is incorrect.

The right answer is A. True.

Gold can soar in value during hard times, when investors are fearful and uncertain and seek safety. The past ten years have provided an example, starting with the turmoil that followed the September 11 terrorist attacks and continuing through the 2008–09 economic meltdown. Concerns about the health of many European economies and soaring budget deficits and political uncertainty in the U.S. have now pushed gold’s price to new highs. These days, you usually see gold’s price rise with bad news (such as the chance that a European nation might default on its debt) and drop with good news (such as upbeat employment reports).

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Gold: What You Need to Know

Question 6 of 10

Gold is a good store of value -- that is, its inflation-adjusted price remains relatively stable over long periods.

A. True
B. False

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Quiz

Gold: What You Need to Know

Question 6 of 10

Gold is a good store of value -- that is, its inflation-adjusted price remains relatively stable over long periods.

You're right! B. False is correct.

Sorry, wrong! is incorrect.

The right answer is B. False.

A store of value implies a steady price, and gold is anything but steady. In fact, its price is twice as volatile as the S&P 500, and it has fallen dramatically over various periods in the past 30 years.

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Gold: What You Need to Know

Question 7 of 10

The most expensive precious metal is:

A. Platinum
B. Gold
C. Rhodium
D. Adamantium

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Quiz

Gold: What You Need to Know

Question 7 of 10

The most expensive precious metal is:

You're right! C. Rhodium is correct.

Sorry, wrong! is incorrect.

The right answer is C. Rhodium.

Rhodium is a member of the platinum family of metals and is silvery-white, hard and very rare. Its price per ounce is just a bit more than gold’s, although gold has narrowed the gap dramatically in the past year. (Adamantium is only found in Marvel comic books.)

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Gold: What You Need to Know

Question 8 of 10

Which country minted the largest gold coin ever?

A. The U.S. Mint in Fort Worth (everything’s bigger in Texas)
B. The Royal Canadian Mint
C. The South African Mint (for the 100-year anniversary of its Krugerrand coin)

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Gold: What You Need to Know

Question 8 of 10

Which country minted the largest gold coin ever?

You're right! B. The Royal Canadian Mint is correct.

Sorry, wrong! is incorrect.

The right answer is B. The Royal Canadian Mint .

The Canadians minted the pizza-pie-size coin, weighing 220 pounds, in 2007. Embossed with a giant maple leaf, it recently sold at auction for close to $4 million.

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Gold: What You Need to Know

Question 9 of 10

What is the most popular gold investment for individual investors?

A. Gold bullion
B. Gold coins
C. Gold funds

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Gold: What You Need to Know

Question 9 of 10

What is the most popular gold investment for individual investors?

You're right! C. Gold funds is correct.

Sorry, wrong! is incorrect.

The right answer is C. Gold funds.

SPDR Gold Shares (symbol GLD), the world’s largest gold-backed exchange-traded fund, has about $70.4 billion in assets. The ETF tracks the price of gold bullion. If you choose to invest this way, we prefer the lower-cost iShares Gold Trust (IAU), which has annual expenses of 0.25%, compared with 0.40% for GLD. You also can invest in numerous mutual funds that invest in the stocks of gold-mining companies.

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Quiz

Gold: What You Need to Know

Question 10 of 10

Which investment is more volatile (and therefore riskier)?

A. Silver
B. Gold

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Gold: What You Need to Know

Question 10 of 10

Which investment is more volatile (and therefore riskier)?

You're right! A. Silver is correct.

Sorry, wrong! is incorrect.

The right answer is A. Silver.

The market for silver is smaller than for gold. Plus, silver has more industrial uses than gold, making the former’s price more sensitive to the ups and downs of the economy. These two factors combine to make silver’s price jumpier than gold’s.

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Gold: What You Need to Know

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Quiz | August 2011

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