Gold Works As a Hedge Against Inflation By MEG RICHARDS, AP Business Writer Tue Apr 4, 5:33 PM ET Gold recently touched a 25-year high, and while it has backed off its peak, experts say a major decline is unlikely. Still, with money pouring into exchange-traded funds pegged to gold, you might wonder whether your portfolio could use a bit more sparkle. There are plenty of good reasons to own gold. Like real estate and other commodities, precious metals can work as a hedge against inflation and serve as important diversifiers because they don't move in lock-step with stocks and bonds. But at its current level, gold might not be such a great buy, and the volatility of its price makes it a dangerous bet for small investors looking to turn a quick profit. "The worst reason to buy something is because you see it in the news," said Michael Iachini, senior research analyst with the Schwab Center for Investment Research. "Don't buy it because it's hot, buy it because you think it's a good investment for your portfolio. An individual investor should not be trying to speculate on the price of gold." Usually investors buy gold when they're worried — about inflation, the value of the dollar, the stability of the markets or geopolitical events. But in the face of low inflation, stable bond yields and a stronger-than-expected dollar, gold has surged to 25-year highs, reaching $596.80 an ounce on Monday. And while prices may droop before going higher, many experts believe it could reach $625, or more. Gold watchers say the recent run-up has less to do with global economic conditions than it does with simple supply and demand. Gold is highly sought throughout the world for jewelry, industrial applications and as an investment. But production slowed following a supply peak in 2001, and it may be several years before it revs up again. The other factor almost certainly driving the gold market is speculation among short-term investors. So if you do choose to buy gold, research your options carefully, and plan to own it for the long haul. "Some investors just like the idea of owning gold. There's a certain romance to it, and that's one of the reasons people buy it. But is that what investors should be doing? Not necessarily," Iachini said. "If you're going to hold it, make it a small piece of your portfolio." So, you could buy bullion or gold coins, like American Eagles, Canadian Maple Leafs and South African Krugerrands. But two relatively new ETFs, pegged to the price of bullion, offer a simple, low-cost way to get exposure without the extra hassle of storage of security. If you want pure exposure to gold, this is the way to get it. "Investors look to gold more than any other commodity as something of fungible value. Regular folks are becoming more in tune to it because they've found new ways to own it," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. "ETFs have made it very easy to own gold like a stock ... literally billions of dollars have found their way to buying gold." More than $6.5 billion has poured into State Street's streetTracks Gold Shares ETF (GLD) since it was launched in November 2004 — the first U.S. ETF to invest directly in gold bullion. The iShares Comex Gold Trust (IAU), launched in January 2005 by Barclays Global Investors, holds another $671 million. Both are tied to the price of gold itself; they buy bars of gold and keep them in a vault, so you don't have to. Gold isn't the only precious metal that's been on a tear lately, either; silver struck a 22-year high, and continues to trade above $11. At least some of the buying has been attributed to the anticipation of institutional investors, ahead of a silver ETF proposed by Barclays; it is still under the review of regulators. The other way to invest in gold, and precious metals in general, is to buy the stock of mining companies. If this involves more company-specific risk than you like, you could choose one of the actively managed mutual funds focused on this space. U.S. Global Investors Gold Shares (USERX) holds about 40 gold mining stocks; U.S. Global Investors World Precious Minerals (UNWPX) holds companies that produce not only gold, but also platinum and silver. Other no-load options with low expenses include Fidelity Select Gold (FSAGX), American Century Global Gold (BGEIX) and Vanguard Precious Metals and Mining (VGPMX). When comparing your options, be mindful of expenses. Specialty mutual funds tend to charge higher fees, and those that invest in precious metals are no exception. In contrast, both the ETFs charge a relatively low 0.40 percent fee, but that advantage could evaporate if you make lots of trades. One caveat about gold investing: The Internal Revenue Service defines gold as a "collectible," which makes direct investments in gold subject to a higher tax rate on long-term capital gains than the 15 percent rate applied to other types of investments. This means capital gains on ETFs holding gold — or silver for that matter — may be taxed at a maximum of 28 percent. This would not be the case for mutual funds holding gold mining stocks.