Is it time to sell your gold?

It’s still a great hedge, but use caution.

Canadian gold companiesOn Monday, April 15, investors watched in horror as gold saw its largest one-day plunge in 30 years. Between the opening the previous Friday and Tuesday morning, the yellow metal’s price dropped 12.5% to US$1,380 an ounce. The fall challenged the resolve of those convinced gold’s decade-plus bull run will continue, and left the rest of us with one of the hardest calls in investing right now: should you buy, hold or sell your gold?

Gold isn’t like other commodities. The price is mostly determined by how people feel about the economy, whether inflation is rising and currencies are being debased. The usual factors of supply and demand typically don’t come into play. “It doesn’t trade off fundamentals,” says Bob Sewell, president and CEO of Bellwether Investment Management, “so you can’t say whether gold is cheap or not.” When sentiment drives an investment, any negativity around it can cause a rapid sell-off.

Like Sewell, Ida Hajadourian Nowak, director of wealth management at Richardson GMP, started reducing her clients’ exposure to gold a couple months ago. She felt sentiment was changing. However, she is still comfortable owning some of the metal. The reason why people should own gold—most experts recommend having up to 5% of your assets in precious metals—is that it’s uncorrelated with equity markets. When stocks go up, gold goes down and vice versa. Gold becomes more popular when currencies are debased and inflation takes off. “It’s one way of protecting wealth,” says Sewell.

Gold has bounced back somewhat since its recent plunge, but Jim Lowell, chief investment officer at Adviser Investments, thinks it will continue to edge down. With no signs of inflation (thanks to a global GDP slowdown) and deflationary pressures in the eurozone, “there’s not a lot of support for gold at current price levels,” he says. He expects it to pull back another 20% before the year is done.

So what’s an investor to do? It depends on your current gold exposure. Sewell says that if 5% or less of your portfolio is in gold, then you should hang on. If it’s meant to serve as a hedge, then it’s still doing its job. If you own more than 10%, both Hajadourian Nowak and Sewell suggest selling, as the volatility could have an impact on your portfolio. Experts are divided as to whether now is a good entry point for those without gold exposure.

There are two other options. The first is to buy the stock of gold mining corporations, which are incredibly cheap on a price-to-earnings basis right now. More than with bullion, mining company valuations are based on real fundamentals. Sewell hasn’t sold his gold stock and suggests buying low-cost, dividend-paying producers. Those that can keep their costs per ounce below the commodity price will continue to create value. Investors more comfortable with risk might consider Lowell’s approach. He’s recommending people short gold using an ETF, such as the Proshares UltraShort Gold fund (NYSEArca: GLL).

Understand, though, that as hard as it is to predict where the stock market is going, it’s even harder to know where the price of gold is headed. Don’t risk money you can’t afford to lose. “There’s lots of crazy speculation out there with gold,” says Sewell. “How far it will fall, or rise, is difficult to know.”

gold chart