Since 2002, the price of gold has soared more than 400%, leaping from an average of $310 an ounce in 2002 to a mouthwatering $1,572 last year. During the same time, the maximum possible return from the S&P 500-from its 2002 low through its 2011 peak-was just 67.26%.

"Gold was in a stealth bull market," observes David Twibell, president of Custom Portfolio Group in Englewood, Colo. "It had been such a laggard for so long that nobody paid any attention at first. That has all changed."


But is it too late? How much longer can that bull market run? The answer depends largely on why gold prices shot up. Are those factors still in play, or has the price plateaued? Some bears say gold is in a bubble that's ready to burst, but for bulls the only question is: What's the best way to hop on board?

Assessing The Gold Market
Not surprisingly, these questions yield a broad variety of reactions. "We're still very constructive on the price of gold," says Paul Simon, CIO of the Tactical Allocation Group, an independent investment firm in Birmingham, Mich. "We still think it has a ways to go."

Simon is optimistic enough to say that every investor should hold some gold. "Less than 5% of one's portfolio is probably not meaningful," he adds. "You could argue as high as 15% if you're very aggressive."

To others, though, it's a question of one's motivations. "If you're looking for a pure total return play, much of the near-term upside may no longer be available," says Jaime Desmond, COO of Ladenburg Thalmann Asset Management in New York City. "But if it's meant to be a defensive investment to hedge out other risks in a portfolio, gold has a lot of value left."

A Safe Haven?
That's because gold is generally seen as a holder of value, especially when the purchasing power of the dollar (and other currencies) is diminishing. "The primary driver for the recent outperformance of gold is this safe-haven investment demand, as gold is seen as a storer of value," says Alex Ashby, a research analyst at Global X Funds in New York City.

But a safe haven from what? Not stock market volatility, to be sure. Properly understood, gold is considered a defensive play in times of inflation-real inflation, that is, as in declining spending power. "Gold is one of a range of alternative investments to hedge against inflation risk," says Michael Green, an economist and co-author of the book In Gold We Trust?

Yet like cash, gold may be best thought of as a savings instrument, not an aggressive moneymaker. "Gold is not owned to make money but to preserve capital, and capital preservation should always be a top concern for investors," says Keith Elflein, director of domestic equity research at Boston-based Silver Bridge.

Supply and Demand
Yet like all commodities, gold's price depends somewhat on supply and demand, too. "There are roughly 5 billion ounces of gold in the world today, and the limited extra supply that comes out each year doesn't make much of a dent," explains James Kingsland, author of the book Coin and Precious Metal Values and host of the "Gold and Silver Hour," a New York City radio program. "The supply dynamics are fairly stable."

The demand side of the equation is another story. "With the recent problems in Europe, gold is becoming attractive as an alternative to the euro," says Paul Wobbe, vice president of Sovereign Investment Group in Houston.

James Shelton, chief investment officer at Kanaly Trust, another Houston-based wealth manager, would agree.
"Ultimately, gold is real money," he says. "You look at the value of gold relative to paper currencies. When central banks around the world are pursuing policies that devalue paper currency, then gold performs well."

Gold is also the collateral of last resort for many large institutions and governments. "Every central bank in the world holds gold as a core asset against paper currency liabilities," further fueling gold demand, says Elflein.

What's more, gold is considered less risky than sovereign bonds, he says, "due to rising deficits and total debt in the Western world"-making gold more desirable than ever. "It does not expire like agricultural commodities," notes Elflein. In addition, compared to oil and gas, gold is "easier and less expensive to store and transport. And it is also virtually impossible to counterfeit or destroy," he says.

Another factor: Since the early 2000s, gold has become easier to own with the advent of exchange-traded funds that track gold prices. (In the U.S., perhaps the most popular is the SPDR Gold Shares [GLD], which debuted in November 2004.) These ETFs are traded on stock exchanges just like regular equity shares, so they are more liquid than actual gold bullion-and easier to store.

The Bulls
All of which may explain gold's recent rise, but what about its future? "We're only about 25% of the way through this bull market," says James DiGeorgia, publisher of the Web site Gold and Energy Advisor (, based in Boca Raton, Fla.

DiGeorgia cautions, however, that when interest rates rise or gold breaks through $3,000 an ounce, it'll be time to reconsider. "You can't just buy it and stash it away and forget about it," he says. "On a quarterly basis, take a fresh look at where things are."

At this point, advocates say, gold is not over-bought. "Go to your next cocktail party or barbecue and informally ask to see a show of hands of people who own gold," suggests Chuck Butler, president of St. Louis, Mo.-based EverBank World Markets. "You will be surprised at the lack of hands."

Bulls disagree, though, about who should have how much. "Clients with a longer time horizon would tend to allocate more towards gold-[that is,] someone who is investing for more than 10 years," says Andrew Rosenberger, senior investment manager at Brinker Capital in Berwyn, Pa. "Smaller allocations are warranted for investors who are quickly drawing down their capital and/or highly reliant on predictable cash flow from their investments."

The Bears
Yet there are bears in the gold woods, too. "The salad days of gold investing are gone," says Mark T. Williams, professor of finance and economics at Boston University. "Gold is an asset bubble that has begun to burst."

Williams notes that as of May 2012, gold prices are already down 15% from their highs last year, and more declines could be coming. "It costs approximately $500 an ounce to mine gold, but currently this metal sells for over three times that cost," he says. "Historically, the mining-to-market cost has been closer to 1.5 times."

Michael Kay of Financial Focus in Livingston, N.J., agrees. "Investors should avoid gold until it plunges back to reality," he says. "Then buy a little, but be prepared to wait until the next meteoric rise fueled by panic."

Skeptics contend that the recent currency crises in Europe and market volatility haven't been the boon to gold prices that one might expect. "Instead, money flowed to U.S. Treasurys," points out Mike Tarsala, a chartered market technician at Covestor, a New York-based asset management concern.

A more philosophical complaint about gold is that it doesn't create added value. "Assets that generate cash-businesses, stocks or real estate-can be valued to a degree. ... With gold, though, you are speculating about the emotion driving its price," says William Hammer, co-founder and managing partner of Hammer Wealth Group, in Melville, N.Y. "I think gold is pure speculation and do not classify it as an investment."

The bear view comes partly from looking at a longer history. "The historical rate of return on gold since something like 1926 is between 4% and 5% a year," says Zack Shepard of Matson Money, a Cincinnati, Ohio-based investment advisor. "At that rate, even starting back when gold was first discovered, one ounce could maybe buy you a nice suit today. It's a horrible investment, with the volatility of stocks but about half the returns."

Still, Shepard isn't against the precious metal in all its forms. "If you own a globally diversified portfolio, the odds are you own shares of mining companies, which we do," he says. "It's OK to get the return from the companies. But to make a bet on a gold bar is not worth it."

The Best Way to Gold
This raises the question of how a savvy investor should best gain exposure to gold. For many, ETFs are simpler, though they do carry trading fees. "I prefer gold ETFs" to physical gold, says Matthew Tuttle, CEO of Stamford, Conn.-based Tuttle Wealth Management. "They are liquid, and I always know what they're worth and don't have to store them."

Physical gold, on the other hand, comes in two forms-bars and coins. (Note that certain historical gold coins have added value to collectors.) Both can only be bought at a premium. "It wouldn't be right to tell somebody to put Gold Eagle coins in their portfolio and not say the maximum amount to pay over the intrinsic value is perhaps $75," warns DiGeorgia. Gold bars, he adds, typically go for about $35 over their value.

Others prefer a mixed approach. "We recommend a combination of physical gold and ETFs," says Albert Lu, a managing director at WB Wealth Management in Houston.

There are other ways to hold gold without having to build your own Fort Knox. Rafay H. Farooqui, the co-founder and president of CAIS, a New York-based provider of alternative investments, offers proprietary shares of precious metals. His platform "allows unambiguous ownership of physical bullion [with] similar liquidity, cost and convenience to ETFs, but without the credit, counterparty and exchange risks," he says.

Still others prefer gold futures. "Why not be invested in a futures contract that follows the straightforward price? ETFs don't necessarily correlate directly, plus they have fees," says Bill Baruch, a market strategist at iiTrader, a Chicago-based futures brokerage. "With gold futures, you get more leverage, too, but you don't have to use the leverage."

Whatever the method, clients who invested in gold in the past might have experienced such a windfall that they need to re-evaluate their holdings. "Without any trimming or rebalancing along the way, gold's decade-long rally has probably created a significant overweight in one's portfolio," cautions Richard Gotterer, a managing director at the Wescott Financial Advisory Group in Miami. "It would be prudent for advisors to review their clients' portfolios and recommend reducing their exposure if it's become too large."

Similarly, personal caches of gold-usually in the form of jewelry-need to be re-evaluated for insurance purposes. "People who own significant collections of gold valuables could be significantly underinsured," says Salem, Va.-based Gary Raphael, senior vice president of risk consulting at ACE Private Risk Services, which is headquartered in Basking Ridge, N.J. He tells of one wealthy family whose jewelry collection was appraised at $400,000 in 2004. Six years later, the same collection was worth $700,000, "primarily because the prices of precious metals and stones had risen," says Raphael. The family "could have been exposed to a six-figure loss."