The price of gold reached a peak of more than $1,400 an ounce in 2010. After a pullback, it trades well over $1,300–five times the level of 10 years ago. Can gold keep rising? Gold bulls point to two reasons:
* The "fear trade." This expression refers to investors’ purchases of gold for protection in case of a catastrophe. Gold prices soared in the 1970s, a decade when both the unemployment and inflation rates reached double digits. Now, deficit spending in industrialized nations have kindled new fears of inflation. Some investors worry that currencies might be devalued as governments print money to pay for social welfare programs.
* The "love trade." Some people buy gold because they prize gold jewelry and other items, for themselves or for loved ones. That’s especially true in emerging markets such as China and India. Today, fast-growing emerging markets have a significant impact on world finances, so the increased demand can push up the price of gold.
One strategy is to keep 5%-10% of your portfolio in a fund that holds gold bullion or gold mining stocks. When the price of gold rises and your allocation is above the target level, sell some gold to reduce your allocation. Similarly, buy gold when the price falls and gold falls below your target allocation.
