Another leading analyst believes that gold prices will remain strong, but not skyrocket. Philip Klapwijk, the chairman of GFMS Ltd., an independent London-based precious metals research company, says that the price of gold could exceed $1,100 per ounce because of safe harbor buying coupled with inflation fears.

"The price may have pulled back a fair bit from the February highs," he says. "But that was largely just the market's reaction to jewelry demand crumbling and scrap booming. It's far from 'game over' for investors and it will be that crowd which sets the price alight."

A GFMS report says U.S. fiscal and monetary policy as well as world central bank policies meant to keep interest rates low should generate higher inflation and gold prices. But Klapwijk cautions that gold prices could trade below $900 an ounce again until inflationary pressures build.

This variety of opinions is why buying and holding a fixed allocation to gold may not pay off in the long run with higher portfolio alpha values. In such a tempestuous environment, caution is key.

Rather than buying gold outright, it could be better for financial advisors to create a tuck-in tactical allocation for gold or for precious metals mutual funds in their clients' portfolios. Tactical allocation has been the suggestion of financial research over the past five years.

By making periodic incremental changes in asset mixes, you can lower client risk while still capturing the new opportunities triggered by gold's volatility.

When the correlation between gold, equity and bonds changes, the mix of assets in a portfolio can be readjusted, says Joe Brocato, a finance professor at Tarleton State University in Stephenville, Texas, in a 2005 study published in the Financial Review. Brocato analyzed a portfolio of gold and nine equity and debt assets. Over the business cycle, he found the variance and covariance among the assets changed considerably.

The reallocation of assets, the results indicated, proved more effective in improving a portfolio's risk-return profile than buying and holding a fixed percentage in each asset class. DiGeorgia recommends that advisors put about 15% of client assets in legal tender American Eagle gold coins, which could be stored in something like a safe deposit box.

But not all money managers believe that tactical allocation with gold is necessary. Michael Cuggino, manager of the Permanent Portfolio, keeps 20% in gold bullion, 5% in silver, 10% in Swiss francs, 30% in stocks and 15% in U.S. Treasury securities and corporate bonds. The fund, which sports a beta of just 0.78, is up 6% for 2009 through June and 8.8% over the past five years.
The gold position "works for us as part of overall long-term diversification strategy," he says. "Gold acts as a defensive asset that protects the portfolio from inflation and devaluation of paper assets."

How Safe?
Some research shows that investing in gold as a safe haven or inflation hedge can be treacherous. It works, but only for short periods, according to a 2009 study by finance professors Dirk G. Bower of Dublin City University and Brian Lucy at Trinity College in Dublin. The researchers compared the relationships between the price of gold and the prices of stocks and bonds over time in the United States, the United Kingdom and Germany.