Come rain or shine, many believe gold should be part of an investment portfolio-particularly today. The huge U.S. and European government deficits, weak currencies and concerns about future inflation are driving gold prices higher.

As of midyear 2010 alone, gold bullion prices were up 10% and precious metals mutual funds gained 12%. Over the past five years, gold has grown at a 19% annual rate, while precious metals funds have risen 22% annually, according to the World Gold Council, New York, and Morningstar Inc., Chicago.

Is investing in gold a sure thing? No. Some analysts point out that U.S. inflation is at a 44-year low, interest rates are at record lows and unemployment is high. In late June, Atlanta Federal Reserve Bank President Dennis Lockhart cautioned that deflation is a risk. With no inflation, gold may not perform as well as expected.

Nevertheless, the greatest driver of gold prices this year is higher investment demand in the United States and Europe, according to Gold Demand Trends, a publication of the World Gold Council. James DiGeorgia, a gold bull and the publisher of the online report Gold and Energy Advisor (, expects the metal to end the year at $1,400 an ounce, and believes it could eventually trade at more than $2,500 an ounce.

"Investors are learning that the major currencies in the world have major risk to the downside," he says. "Gold is seen as a safe haven and inflation hedge due to huge worldwide government deficits. There is a finite supply of gold, and demand is very high. Central banks are diversifying their reserves into gold, and this trend should continue."

DiGeorgia reports that many financial advisors are buying legal tender gold coins such as American Eagles and want to diversify away from gold bullion and mining stocks.

Legal tender coins are liquid, don't need to be assayed and can be sold in much smaller amounts than 100-ounce gold bars. Gold stocks and precious metals mutual funds, meanwhile, don't act the same way as the price of the actual metal. They are more volatile and are a paper asset tied to the value of a company. For example, when the financial markets collapsed in 2008, gold stocks plunged with the rest of the stock market. By contrast, the metal itself acted as a hedge against paper losses.

DiGeorgia has concerns about GLD, the exchange-traded fund that invests in gold bullion (and which is sponsored by World Gold Trust Services LLC, a wholly owned subsidiary of the World Gold Council). In a major gold market sell-off, liquidity in GLD could dry up, and investors may find it hard to sell at the price they desire. This happened to bond exchange-traded funds in 2009 and to equity ETFs during the May 6, 2010 "flash crash."

Although coins sell at a premium to bullion, DiGeorgia adds, advisors can save $500 on the wholesale cost and $900 on the retail cost by buying gold coins in rolls of 20.

Many advisors buy and hold coins for long-term hedges. Others who want to avoid large losses in the volatile investment can use trend analysis based on changes in interest rates and price charting. Technical trends can help advisors get out of the market and avoid large losses.

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