Rival Vanguard Group, however, shuns gold bullion as a mutual fund investment. Christopher Philips, senior investment analyst in Vanguard's investment strategy group, likens investment in gold to the technology bubble. He challenges would-be gold bullion investors to look at gold today relative to five or ten years ago.
He cites three chief reasons most investors hold gold bullion:
A hedge against inflation.
A hedge against the dollar to diversify paper currency.
Disaster insurance.

Philips contends, however, that there is zero link between gold and inflation: Just look at the last ten years in which there has been minimal inflation in the United States. If gold were linked to inflation, you'd expect gold prices to be flat, he asserts.

If you're considering it for clients as a dollar hedge, look at the price of gold in other currencies, he suggests. You'd expect to see performances somewhat different across currencies, he says, but if you look at the euro, yen, pound and Australian dollar, you see gold appreciating across all currencies.

While a lot of advisors would say to put no more than 5% of your portfolio in gold, the flip side of that: "If you do have 5% in your portfolio, the aggregate impact to your portfolio isn't that great," he says. Meanwhile, "it's a very, very volatile asset class. You may be buying at its peak."

If a financial disaster doesn't happen, he reminds that gold prices went through 25 years of year-to-year negative returns. The recent stock bear market has only run for ten years.

Turk and other gold bullion traders have warned that a greater risk to gold investing than fraud and inferior gold quality may be the short-selling of gold in paper transactions and careless use of subcontractors. As gold bars are lent out, they may or may not come back intact. In fact, John Paulson, the famed hedge fund manager, holds an ownership stake worth more than $4 billion in the SPDR Gold Trust, according to the SEC 13F form filed by Paulson & Co. Inc for the quarter ending last September 30.

"Let's say John Doe buys 100 shares of GLD thinking his shares are backed by gold," Turk says. Those shares can be lent to a hedge fund, which sells the fund short. You don't actually own the gold. You own paper saying you own the gold."

A third party audit may help mitigate this risk, Turk suggests. But beware that the quality and scope of audits on paper gold investments can vary dramatically.

SPDR Gold Trust makes public its audit, by Inspectorate International Limited, Wiltham, Essex, in the United Kingdom, which last September was acquired by Bureau Veritas, Neuilly-sur-Seine, France.

At this writing, its most recent audit, released November 1, 2010, represented a count as of June 30, of 105,513 bars of gold. It cited "anomalies" in 441 gold bars. The errors involved incorrect numbering and incorrect refiner brands on the bars.