Gold Coins StackedGold critics have been very vocal recently due to volatility and unpredictability in the gold market. Fans of gold, however, know that this is just part of the deal when investing in the precious metal. The gold market may occasionally go a bit haywire, but the long-term benefits should reward patient investors.

In the middle of 2011, physical gold hit a record high. Over the next two years, the precious metal’s price has dropped over 30 percent. Despite this fluctuation, financial advisors stress long-term thinking. Most say that gold can act as a hedge against inflation and can protect a portfolio from a weakening U.S. dollar, since gold’s price tends to rise as inflation increases.

In an interview with the Wall Street Journal, Chris Hyzy, managing director and chief investment officer of U.S. Trust, the private-banking arm of Bank of America Corp, recommends that investors include gold in their portfolios, despite the fact that “people have been second-guessing gold as a hedge.” Hyzy says, “You have to take a very long view if you’re a buyer or owner of gold today.”

Some advisors, like Joe Heider, managing principal at Rehmann Financial, recommend less volatile hedges against inflation, like Treasury inflation-protected securities. Heider believes that gold has virtually no fundamental, intrinsic value and doesn’t produce cash flows.

Nevertheless, gold can offer something that other investments cannot: protection against financial and economic meltdown.

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Jeffrey Nichols, managing director of American Precious Metals Advisors, says, “Historically, the price of gold has hardly had any correlation with the price of other investment categories. Because of this, it provides an insurance policy against systemic and other risks that might affect [the majority of] your investments and savings.”

In other words, when other investments go one way, gold goes the other. This can ease the overall volatility of a portfolio.

Mr. Nichols also says that increased gold demand in China and India, due to a growing middle class, should help the metal grow in the next five years. “In the next three to five years, we’ll see gold well above its historic high,” Nichols claims.

Financial advisors that take a favorable view of gold typically recommend investing between 5 and 10 percent of a portfolio in gold. They also advise investing in the physical metal like gold coins, rather than in the mining companies, ETFs or other investment vehicles. It is also important to rebalance a portfolio on a regular basis.

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