Smart Money has an article about preciously skeptical investors capitulating and buying gold. Apparently, the spike in gold prices last week has convinced reluctant investors to add the metal to their portfolios.
I wrote about gold as an inflation hedge back in April. At the time, gold was trading for about $1400 an ounce. Today, it is trading around $1800. There has been no significant inflation over the past four four months. Indeed, gasoline prices are lower, and the second round of quantitative easing by the Fed (QE2 or monetizing the debt) was concluded over a month ago. Granted, the Fed announced last week that it would keep interest rates at their current low levels for two more years, but it does not appear that any major market activities are taking place to implement that policy right now.
What is driving gold prices now is economic uncertainty and turmoil in the capital markets. As a store of value against calamity, gold performs exceptionally well. The relative scarcity and its general acceptance as valuable ensure its place as portfolio insurance.
In my view, it is time to cash in some of that insurance. Whether purchased at $300, $800 or $1400, gold has paid off in providing a very nice return over the past three years of economic tumult, Now it is reaching extreme levels. Many institutions are taking some of their chips off the table. I would recommend the same.
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