Like all commodities, gold falls into the category of alternative investments — those that can be added to portfolios of traditional investments, such as stocks and bonds, to lessen risk. Alternative investments historically aren't as likely to decrease in value when stocks and/or bonds do, but sometimes they do. When the markets declined in 2008, gold went down with them.
Also, short-term investments in gold can be used to protect against currency declines. If the dollar declines against foreign currencies, an ounce of gold will be worth more dollars. As the buying power of the dollar has declined against the yen and the pound recently, gold has gone up.
But the use of gold in such strategies can be quite tricky, so I don't generally recommend this for individual investors. Even when used sparingly and carefully in broad portfolios, gold has the fundamental problem of being volatile in the long term. It doesn't produce what we primarily invest to obtain: a future income stream. Stocks provide an income stream in the form of dividends and earnings growth, and bonds do so in the form of interest. Gold offers none of these.
Despite these shortcomings, gold can play a strategic role in sophisticated portfolios. But because gold can't deliver long-term returns, it's not the Holy Grail touted in the ads.
Ted Schwartz, a Certified Financial Planner®, is president and chief investment officer of Capstone Investment Financial Group (http://capstoneinvest.net). He advises individual investors and endowments, and serves as the advisor to CIFG Funds. Because Schwartz has a background in psychology and counseling, he brings insights into personal motivation when advising clients on achieving their wealth management goals. Schwartz holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at firstname.lastname@example.org