Investment Odd Couple

Through the third quarter, an odd couple has emerged as big winners in the investment world. The Dow Jones Industrial Average, representing the broad U.S. stock market, is up 14 %, while gold futures are up 19%.

Usually, a rise in the stock market reflects a confidence in an economic recovery, while an increase in gold prices indicates investors fear an unstable economy. Therefore, these two investment markets usually move in opposite directions. However, low interest rates and government stimulus have poured cheap money into financial markets, helping stocks. Yet the creation of all that money, together with the Federal Reserve's maintenance of near-zero interest rates and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and economic volatility. This, in turn, creates a growing interest in gold.

While many institutional investors have been placing large bets on gold, gold futures can be volatile and probably shouldn't compose more than 5 percent of an individual investor's portfolio. While it's true gold futures have soared from $250 in 1999 to $1,055 for a troy ounce, gold would still have to double to $2,291 to reach its 1980 high adjusting for inflation. This illustrates why gold has not been a solid long-term investment. If you are interested in gold, be sure to buy gold futures on a legitimate exchange, not those pretty gold coins you see on TV late at night.

Of course, these type of investment decisions and building a well-rounded portfolio can be complex, working with a financial advisor can help. It's best to speak with an independent fee-only financial planner to make sure your investment portfolio represents your risk tolerance, investment goals, and time horizon before taking any action.