Gold was a long forgotten asset in 2001, trading at about a third of its price in 1980. But gold became a hot commodity by April 2011, when its price surged from $271 to $1,923 an ounce in roughly 10 years, and the State Street Gold ETF (GLD) became the largest ETF by asset size.

Those who bought gold out of a misguided presumption of the demise of the dollar and other paper currencies were merely exercising the predictably irrational human tendency to chase performance. This tendency is expressed in buy high/sell low behavior, as gold is currently trading at about $1,254 as of June 9, 2014.

Bought for the right reason, however, gold can be a good diversifier. To be considered a good alternative investment, gold would have to have a low correlation to U.S. stocks and a positive expected return.

According to my calculations from data derived from OnlyGold.com, gold has appreciated by 5.0% annually, over the past 40 years, besting the CPI annual increase of 4.0% annually, thus delivering a positive real return, though far lower than stocks.

The next criteria is to have a low correlation to traditional assets. According to Business Insider, the correlation between gold and the S&P 500 has averaged close to zero since 1965, never going above 0.5 or below -0.5. Thus, it meets this criteria as well. Gold also has a strong positive correlation with oil, meaning that it could be a good store of purchasing power.

Finally, author and financial theorist William Bernstein noted in his book Deep Risk that gold could have a limited role in a scenario where the government confiscates assets. It’s improbable however that, under a full collapse, we would be showing up at the grocery store to buy milk and eggs with gold.

It appears that a small amount of gold in a portfolio can act as a good alternative asset to diversify risk. It’s also clear that gold is a better deal today than in April 2011, but that doesn’t mean we know what the price will be three years from now. We at least know that adding gold to a portfolio today isn’t performance chasing.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for CBS MoneyWatch.com and has taught investing at three universities.

Allan S. Roth

Allan S. Roth

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for AARP and has taught investing at three universities.