Get In On The Gold Rally?

Stock market volatility has given investors gold fever. If you chase the rally, don’t overdo it.

- John Waggoner

Gold, which did little except glitter for most of the past five years, has seen price gains this year that rival Standard & Poor’s 500stock index. Gold began the year at $ 1,279 an ounce, and it is currently trading at $1,498, a 17.1% gain. The S&P 500 is up just a shade more. (Returns and other data are through August 9.)

Gold is trading at its highest price since April 2013. The price could continue to rise if stock market volatility and global growth concerns persist, says Wells Fargo strategist John LaForge. Or it might need to rest before rising again. Nonetheless, says Joe Foster, portfolio manager at the VanEck funds, “If a recession is on the horizon, then gold could hit new highs.”

If you’re thinking of chasing the rally in gold, be sure you’re buying for the right reasons. Speculators in gold are often disappointed, but the metal does have some uses, in small amounts, as a portfolio diversifier, an inflation hedge and insurance against financial catastrophe.

Gold has been used as money since King Croesus of Lydia minted the first gold coins in the sixth century B.C. But no country makes gold coins for circulation anymore. Although jewelry is now the primary use for the metal, investor demand is what drives the price of gold, and fear is what drives investor demand—fear of inflation, war, a government coup or some apocalyptic event.

You don’t need a catastrophe for gold to rise in price. Gold rose from $712 per ounce in October 2008 to more than $1,800 an ounce in August 2011 as the U.S. reeled and recovered from the largest recession—and bear market in stocks— since the Great Depression.