One Saturday afternoon, many years ago in my youthful days, I decided to purchase a new gas grill. It came in a large box, upon which were written in bold letters - "Some Assembly Required." I quickly learned, and have never forgotten, how ominous those three words can be. After several frustrating hours I accepted the fact that I had no mechanical ability whatsoever. Now, when similar purchases are made I pay the store to assemble it, or... my wife puts it together.

Of more recent and relevant note, a few people have asked me to share my opinion about whether now is a good time to buy gold. For the record, the price of gold is up about 250% over the last ten years, far outpacing the S&P 500, which is actually down 16% over that time frame. On a longer-term basis, from 1987-2009, gold has significantly lagged stocks, advancing 126%, while the S&P 500 appreciated 326%. That alone should tell you something...

To begin with, gold is typically held for three investment purposes. Essentially, gold is used as a hedge against certain economic scenarios, including: runaway inflation, a continued decline in the US Dollar, or more generally, pervasive fearfulness. In essence, the price of gold is driven by the market's views on the future trends in inflation, the outlook for the US Dollar, and the overall sense of worry about, well, anything worth worrying about. That is quite a lot to get one's hands around, but let me try to tackle each one of these separately.

Inflation under control, at least for a while...The relatively weak labor market, low capacity utilization, and a deleveraging consumer are not typical precursors to runaway inflation. Importantly, the vast majority of consumer inflation is driven by labor costs, not by commodity prices. Given this, I think inflation will stay subdued for the next few years. The fly in the inflation ointment is the growing federal deficit. Many pundits are convinced that current accommodative monetary policy and deficit spending will lead to accelerating inflation and ultimately higher interest rates. However, there is something significant happening that these pundits are ignoring, that being the Great Deleveraging Cycle. Generally speaking, consumers are not spending or borrowing, and are saving for the first time in a generation. Now I know that it just looks like all we have done is transition the "live beyond your means mentality" from individuals to the government, and perhaps in the short term we have, but politicians follow, they do not lead. If we as individuals stick with a more responsible fiscal lifestyle, then eventually the government will follow. When they do, the argument for runaway inflation crumbles.

I do admit that the timing of this transition is impossible to forecast. Perhaps it will take a bout of inflation for the tide to turn. Let's hope not. Bottom line - buying gold as a hedge against runaway inflation is not a bet I recommend.

Dollar in the doldrums... The US Dollar Index has fallen about 37% from its high in January 2002. Low interest rates in the US, superior growth prospects in much of the developing world, and concerns about our federal debt, have all led to the decline in the US $. Once it becomes clear that the domestic economy is on solid ground, the Fed will likely begin a slow and steady process of raising interest rates. This should remove some of the pressure on the US $. In the meantime, it is difficult to make a compelling case for a sustained rally in the US $. So, from this perspective, a gold hedge makes a little more sense.

Nothing to fear, but fear itself... Since the stock market low in March, gold has rallied about 20%, while stocks have rebounded nearly 60%. Despite the economic challenges and geopolitical risks that remain, my sense is that the level of fear has subsided. The financial system has stabilized, credit markets are slowly opening up, and it appears we have weathered the worst of the economic storm. Maintaining a gold hedge makes less sense from this standpoint. From a portfolio perspective, we do have a reasonable exposure to the energy sector, which is a less volatile way to hedge against geopolitical risk.

So, in my view, it is a little late in the game for gold to continue to outperform stocks. At the very least, I think it is safe to say that buying gold now is not early in the investment cycle, given how much it has outpaced stocks over the last ten years. In any event, an investment in gold requires a level of comfort forecasting inflation, the currency markets, and investor psychology. Again, it is no easy task to put all that together. Way more difficult than assembling a gas grill...