By Ben Baden

It wasn't so long ago when the Euro was flying high and some experts were predicting that the dollar could be replaced as the world's reserve currency because of the United States' ballooning deficit. Now, there are fears that Greece could default on its debt and even the Euro may cease to exist. The dollar has made gains against the Euro, but the real winner in this debt crisis can't be printed by central banks. It must be harvested by miners: gold.

While the Euro has taken a hit, gold has shot up to all-time highs, above $1,200 per ounce. Investors must decide for themselves whether or not commodities like gold belong in their portfolio, but for those who want to know what all the fuss is about, here are a few things to know:

It has never been easier to invest in gold.

Exchange-traded funds have revolutionized investors' access to commodities. "The ease and liquidity of ETFs have really opened up commodities in general as a new asset class for investors," says Tom Lydon, editor of ETFTrends.com. "In the past, for investors to buy gold, they either have to buy the coins or the bullion, and now in the form of ETFs there's a whole variety of options," Lydon says. In addition to buying gold through futures contracts, investing in physical gold -- bars in underground vaults -- through ETFs is now possible.

Gold can diversify.

A small amount of gold can limit the overall volatility of your portfolio because it often performs differently from mainstay investments like stocks and bonds. "Gold and some other types of commodities are what you call non-correlating assets, so they tend to move independently of overall moves in the market," says John Diehl, senior vice president in the retirement division at the Hartford. Gold sometimes reacts differently to market selloffs, which can help offset losses in stocks.

Gold as a reserve currency.

The past few weeks have been a roller coaster ride for stock investors, punctuated by steep falloffs and strong rallies. The market's behavior is partly due to worries that debt problems in some European countries like Greece could spread to other parts of the European Union and damage the Euro. The dollar has rallied somewhat in responses, but the United States has debt problems of its own.

The world's primary reserve currency -- the most commonly held currency by central banks around the world -- is still the dollar, but when fear strikes the market, many investors flock to the safety of gold. "It's not irrational that people are buying more gold right now because in the past, you had two reserve currencies, potentially, then you were down to one with the Euro, and now you may be down to none for a while, so gold is really the ultimate reserve currency," says Paul Zemsky, head of asset allocation for ING Investment Management. "It's the only thing that holds its value even if central bankers and governments are eroding the value of their own currency." When there are global concerns about monetary policy, Zemsky says, gold will benefit from a flight to quality.

It has been a good, long run.

The shiny metal set record highs last week. Diehl says he is worried that some investors who are new to commodities may not know what they're getting into. "If fear in the market is at a high and everyone you talk to is saying, 'Hey, you should put your money in gold,' as a contrarian investor, that should be somewhat of an alarm to say, 'Is this really the right thing to do? When everybody says, 'Now is the right time to buy anything,' you can generally feel fairly confident that it probably isn't," he says. A general rule of investing, Diehl says, is to look for asset classes that seem to be undervalued, and gold could be reaching its peak price.

Gold can be extremely volatile.

Gold can provide diversification, but investors should be aware of the risks of investing in commodities. "Gold is really a precautionary hedge and not something your whole portfolio should be in," Zemsky says. He recommends that investors only have 3 to 5 percent of their overall portfolio in gold. Diehl is even more cautious. "A singular bet on gold is, at its core, still a singular bet," he says. "Just as emotions are volatile, the price of gold is a pretty volatile asset."

He suggests finding a fund that invests in a broad basket of commodities and not just in gold alone.

Two popular choices are PIMCO Commodity Real Return Strategy Fund (PCRAX) and PowerShares DB Commodity Index Tracking Fund (DBC).

10 Things You Didn't Know About the Euro

1. The idea for establishing a single currency in Europe was approved upon the signing of the Maastricht Treaty, formally titled the Treaty on European Union, on Feb. 7, 1992.

2. The euro was launched in 11 countries as a virtual currency--used only for non-cash and electronic transactions--on Jan. 1, 1999.

3. Euro banknotes and coins, for public use, weren't introduced until Jan. 1, 2002.

4. The European Central Bank is authorized to issue euro banknotes and coins. Each country's national central bank is responsible for producing and circulating them.

5. There are seven different banknotes. They come in 5-, 10-, 20-, 50-, 100-, 200- and 500-euro denominations. There are eight different denominations of coins: 1, 2, 5, 10, 20 and 50 cents, and 1 euro and 2 euros.

6. Each euro banknote has a standard design on one side and a country-specific design on the other.

7. The euro symbol was based on the Greek epsilon character, representing "E" for Europe. The two parallel lines through the center signify stability.

8. Denmark and the United Kingdom are the only European Union member states to opt out of using the euro as currency.

9. Greece has been part of the euro zone, the area comprised of nations that have adopted the euro, since 2001. Slovakia was the most recent country to adopt the currency, doing so in 2009. Sweden is expected to be the next.

10. To date, 16 EU member countries, and approximately 329 million people, use the euro. Nine EU member countries have not yet met the requirements for its adoption.

Source: European Central Bank

Available at Amazon.com:

The Seven Deadly Sins of Investing: How to Conquer Your Worst Impulses and Save Your Financial Future

 

Investing - What Gold Can and Cannot Do For You | Successful Investing

© U.S. News & World Report

 

Personal Wealth & Finance ...

CAREERS | INVESTING | PERSONAL FINANCE | REAL ESTATE