All that glitters may not be a good hedge

As I walked through Dubai airport recently, I was struck by the large number of travelers who were buying gold coins. They were not reacting to Dubai's financial trouble, but rather were joining the eager rush to own gold before its price rises even further. Such behavior pushed the price of gold from $400 an ounce in 2005 to more than $1,100 an ounce in December 2009.

Gold buyers include not just individuals, but also sophisticated institutions and sovereign wealth funds. Recently, the government of India bought 200 tons of gold from the International Monetary Fund.

Many gold buyers want a hedge against the risk of inflation or possible declines in the value of the dollar or other currencies. Both are serious potential risks that are worthy of precautionary hedges.