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Tickers in this Article: NEM, GLD, GBX, JPM, BSC
On Monday gold topped $1,000 per troy ounce, something many thought inconceivable. At this moment, it is a good time for investors to take a step back to examine why gold is trading at elevated levels, its price history and what this means to gold stocks. (To find out how gold is priced, read Who sets the price of commodities?)

What Me Worry?
Over the weekend, news surfaced that JPMorgan (NYSE:JPM) will buy Bear Sterns (NYSE:BSC) for $2 a share, based on the latter's subprime bombshell. What's more, the Fed announced it would cut the emergency lending rate to financial institutions by a quarter point to 3.25%. The bottom line is, with the collapse of Bear Sterns, Fed Heads are obviously very worried about liquidity issues at other major investment banks.

In terms of the financial markets, "flight to gold" means investors are liquidating positions to buy the one precious metal that has historically held value during extreme times. When investors pile into gold, it means they're worried that other instruments (like stocks) could fall through the floor. And right now, there's plenty of reason to worry.

Moreover, many are expecting the Fed to cut the overnight rate again on Tuesday, perhaps as low as 1.75%, from the present 2.50%. Add on the fact that last week the Fed committed another $200 billion to banks and investment houses, and really, the whole economic enchilada is looking more like mince pie.

At the end of the day, lower interest rates generally do not bode well for the U.S. dollar, which in turn, adds upward pressure to precious metals, like gold.

Inflation or Geo-Political and Economic Trepidation?
Historically, gold has proved to be hedge against geopolitical tension and economic woes. According to a September 2007 article by InflationData.com, "In times of uncertainty investors turn to Gold as a hedge against unforeseen disasters since gold is one of the few investments that is not simultaneously an asset and someone else's liability."

The article explains how the 1980 peak in gold prices is more than $2,100 in 2007 inflation adjusted dollars, and it fell to less than $346 losing a whopping 84% of its value. Therefore, even though inflation rose, gold fell because the fear level was low and also possibly because governments worldwide manipulated the price.

Right now though, fear levels are very high, especially when considering the economic woes in the United States. So, on an inflation adjusted basis, gold could easily have more upside, especially if the U.S. dollar continues to fade. (To find out how inflation relates to your investment portfolio, read What You Should Know About Inflation.)

Digging for Gold
Investors who believe there's upside in gold may be wondering where to park their cash. And while companies that do not hedge inventory, like Newmont Mining (NYSE:NEM), are attractive, the lack of diversity could hurt portfolio returns in the end.

Instead, investors can look at exchange-traded funds (ETFs), which are basically mutual funds that trade like a stock. The Market Vectors Gold Miners ETF (AMEX:GDX) attempts to track the American Stock Exchange Gold Miners Index and gives investors immense diversity within the industry. Year to date, the ETF is up just under 17%, a staggering return when considering the Dow Jones Industrial Average is now down more than 7% for the year.

Another gold ETF worth considering is the StreetTRACKS Gold Shares (NYSE:GLD), which is run by a division of the World Gold Council and represents one-tenth the actual price of gold. For 2007, StreetTRACKS Gold Shares are up about 31%. (To read more on how to invest or trade in gold, see A Holistic Approach To Trading Gold.)

Conclusion
With so much uncertainty in the present market, it might be a good idea for investors to park a portion of their portfolio in gold, as a hedge against further downside in equity markets. However, putting all your eggs in one basket is never a good idea, and thus, moving all assets into gold would certainly be foolish. However, sometimes parking some cash behind a hard asset like gold, can help us sleep easier at night.

For more information on gold as an investment, read Does It Still Pay To Invest In Gold?

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