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I've put most of my retirement money in silver and gold. Everyone tells me this is a folly, for those precious metals have had their run in high prices. However, because of global inflation, I just don't trust currencies anymore and feel that true value is in the good old precious metals. Am I being totally reckless?
— Allysa H., Fords, N.J.

Well, not totally.

It’s true that if inflation gets out of control again, precious metals should hold their value as the buying power of paper currency erodes. It’s also true that after an unusually long quiet spell, inflation seems to have perked up a bit. Precious metals are also seen as a refuge when the economy hits the skids. In countries where political instability or financial market meltdowns threaten to erode wealth, precious metals can be an effective place to hide.

The result has been a stampede to gold and a resulting surge in gold prices. Since the beginning of 2006, gold prices doubled to more than $1,000 an ounce before pulling back to $900 in the past few weeks. “Gold bugs” — the folks who seem to believe there’s never a bad time to buy gold — would like see that pullback as a good time to buy.

But the conditions that send gold prices higher can also reverse course and send them back down again. We’ve seen this movie before, and for many “buy and hold” gold investors, it ended pretty badly.

The last time gold prices went through the roof was at the tail end of the 1970s, a decade that produced one of the worst inflationary spirals in modern history. Heavy government spending on social programs and the Vietnam War, along with an easy-money Fed in the in early 1970s, touched off a decade of inflation that defied repeated government efforts to thwart it.  Soaring oil prices compounded the problem.

Gold prices responded accordingly. At the beginning of 1979, an ounce sold for $200 and then rose more than fourfold in a little over a year.

But it turned out that the direst predictions about inflation and the economy didn’t pan out. After the Volcker Federal Reserve slammed on the brakes, pushing interest rates as high as 20 percent, inflation began to subside. Oil consumption began falling after cash-strapped homeowners weather-stripped their windows and drivers sick of lining up for gasoline traded in their cars for more fuel-efficient vehicles. As oil consumption fell, so did prices.

It didn’t take long for gold prices to come crashing down as well. By the middle of 1982, the economic storm clouds began lifting, the stock market began one of the biggest bull runs in its history, and those $850 ounces of gold were soon worth $300 apiece. Two decades later, after some ups and downs along the way, gold was still selling for $300 an ounce.

There’s nothing inherently foolhardy about any individual investment category, whether it’s stocks, bonds, real estate or art. Even rare Beanie Babies had their day on eBay. What’s risky is putting all your investment chips into the pot on a single bet. All of these investment categories have their ups and downs, and no one can predict with any accuracy when they will come.

It’s impossible to know how this surge in gold prices will end. (Keep in mind that the people who speak with the greatest confidence about an investment are often the ones selling the very investments for which they claim great forecasting ability.)

So as long as you understand that gold prices could come down as fast as they’ve gone up, go for it. If inflation spirals out of control and the global financial system collapses, you’ll be sitting pretty.

Then again, if that happens, you’ll probably have more to worry about than the price of your gold.

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