Gold ETFs Still Shine in a Diverse Portfolio

According to some analysts, gold may hold the bulk of this run into 2012.

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Gold's appeal as a "safe" investment relative to a weaker dollar and battered global stocks lands the metal in record territory, up some 32 percent so far in 2011.

By contrast, global stocks are at their lowest in more than a year.

Factors that could keep gold's price elevated include ongoing struggles to fix European and U.S. debt burdens and signs that the global economic recovery has hit a rough patch worrisome enough to keep ultra-low interest rates in place. Investors tend to flock to gold as the dollar weakens, making "hard" currencies more attractive. Investors may also be betting that inflation, which eats away at the value of other assets, will eventually become a problem to reckon with.

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"Fears about sovereign defaults and currency debasement have left many investors concerned about switching from equities into government bonds, and cash hardly looks an attractive alternative when real rates are negative. Gold has therefore been the main beneficiary of all these concerns," Citigroup analysts said in a research note issued in late August.

This surge in gold demand makes it difficult to determine whether the precious metal's price—already over $1,900 an ounce for futures contracts—is, in fact, too precious.

"Successfully timing a short-run gold investment is not an easy task," says Morningstar fund analyst Abraham Bailin. "When bullion prices are soaring, it's all too easy to jump on the gilded bandwagon. Gold prices soared in the early 1980s, and many speculative investors poured into the market only to lose their shirts after the price of gold collapsed."

According to some analysts, gold may hold the bulk of this run into 2012; at least three major investment banks hiked their price forecasts in August, though some do expect gold to pull back from what they see as current highly speculative levels.

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Moving target. "We think gold has enough momentum currently to travel north of $2,000 before year-end, but we caution that some volatile price moves—both to the upside and the downside—lie ahead," says UBS analyst Edel Tully.

French bank Societe Generale upped its fourth quarter gold forecast to $1,950, lifting its 2011 average to $1,660.

Citi pegs its 2011 forecast for spot gold to $1,590, up from its previously estimated $1,440; the 2012 forecast stands at $1,650 from $1,325 and the long-term forecast to $1,050 from $950 an ounce.

All that glitters. Retail investors largely get their exposure to gold through exchange-traded funds (ETFs). After all, it's much easier to send and store electronic trading information than heavy bricks of gold bullion. Plus, futures markets are largely dominated by large institutional investors or corporate participants. Coins can be a fun and fiscally prudent alternative, and investing volume in this category is up sharply as well, but transaction, storage, and insurance costs must be taken into consideration.

In late summer, the SPDR Gold Shares ETF (symbol GLD), passed the popular SPDR S&P 500 (SPY) to become the largest ETF measured by net assets. Net assets in the gold fund around mid-August were $76.7 billion versus $74.4 billion in the S&P 500 fund, according to data from State Street Global Advisors.

The factors behind that demand may remain in place. Recent weak U.S. economic data raise the possibility of more help from the Federal Reserve in the form of more quantitative-easing programs that will make borrowing costs, and the dollar, remain historically low.

Continued demand for the yellow metal from the likes of Russian and Mexican central banks or for gold's increased role as a global financial system benchmark could keep upward pressure on prices. Plus, signs of inflation risk in China and other pockets of the emerging globe increase gold's appeal.

Even with those factors, gold investing warrants caution. Futures exchanges have demanded greater margin requirements, which reduced gold demand, at least on a short-term basis.