The Gold Frenzy: Why Investors Should Resist

The price of gold is at a record high, attracting the attention of many retail investors. But this precious metal is no safe haven

As an investment, gold has never been more popular. And, for individual investors, that's part of the problem.

Gold spot prices hit a record of $1,243.10 per ounce in Comex trading on May 12 before slipping $13.90, or 1.1 percent, to $1,230.10 on May 13. In the past three years, the precious metal is up 84 percent. The SPDR Gold Shares (GLD) exchange-traded fund now contains $48.1 billion in assets, with the number of shares outstanding up 111 percent since September 2008.

Encouraged by TV and radio ads touting the virtues of gold, retail investors are buying it up. One leading gold dealer, Goldline International, estimates it has added 50,000 clients in the past three years. The gold frenzy is worldwide: On May 13, a vending machine that dispenses gold bars was unveiled at Abu Dhabi's Emirates Palace hotel.

Financial experts warn that all this enthusiasm for gold could be a warning sign—that gold prices could be near their peak. "It's very in vogue right now, which is usually a telltale sign [of] a bubble-like mentality," says James Miller, president of Woodward Financial Advisors in Chapel Hill, N.C.

Gold's advocates may be right that the metal could head higher still, driven by the fiscal crisis in Europe, high deficits in the U.S., and fears of inflation. "All we can do is put our money into real assets, because paper money everywhere is being debased," Jim Rogers, chairman of Rogers Holdings, told Bloomberg Television on May 12 as gold hit new highs.

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