Gold Sell-Off Shows No Investment Is Safe

The best way to protect your money is to take a few risks.

By + More

Gold is supposed to be the one investment that holds its value when everything else goes down the drain. But the recent plunge in gold prices shows that even the safest investments can be mighty risky these days.

[READ: Ben Bernanke Swamps the Gold Bugs]

Gold prices have now fallen 17 percent so far this year, to about $1,380 an ounce, and 28 percent since they peaked at $1,921 in 2011. In a way the drop in gold is good news, because it reflects a more upbeat view on the global economy; investors are starting to believe it's safe to put their money into riskier assets such as stocks, which is cutting into demand for gold, causing the collapse in prices.

There could be a catch, however. Many Wall Street analysts believe a 5 or 10 percent stock-market correction is coming, even as investors pour money into stocks. U.S. Treasury securities are still considered safe investments, except that low interest rates, engineered by the Federal Reserve, may not even keep up with inflation – which means principal could slowly erode over time.

"Don't think for a moment there is a place to hide," says Axel Merk of Merk Investments. "There may be no such thing as a safe haven anymore."

[MONEY: 3 Ways the Gold Standard Affects Your Wallet]

The recent surge in the stock market – which has hit several new all-time highs during the last month – belies the caution many investors still seem to feel about taking too many risks. Sam Stovall of S&P Capital IQ points out the biggest stock gains this year have come from "defensive" sectors, such as health care and utilities, that tend to do well even during a bear market. That suggests investors are expecting a downturn, even as they commit more money to stocks.

One reason for the reluctant move into stocks is that money managers have been warning their clients of the hidden risks of keeping too much money in Treasury bonds or other supposedly safe investments. If interest rates begin to rise, as many analysts are predicting, existing bonds paying below-market rates will lose value. And if higher inflation accompanies higher interest rates, it will degrade the value of low-rate investments even more.

"There's danger in safety," says Russ Koesterich, chief investment strategist for BlackRock. "The Fed has left investors with a very Hobbsian choice: Either take on more risk or accept lower returns."

[ALSO: In Defense of the IRS]

The unusual degree of uncertainty in financial markets reflects the fundamental question that still dominates the global economy: Can the markets stand on their own, without the extraordinary aid provided by the Fed and other central banks? Or is the economy still hobbled by speculative bubbles and too much debt?

For investors, the age-old solution is to diversify. Wells Fargo, for instance, recently advised clients that precious metals such as gold should represent only about two percent of a typical investment portfolio. For anybody with less than that, the recent drop in gold prices may be a good chance to buy. The safest approach to protecting your money, however, may be to take a little bit of risk on everything.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.