Making Sense of Gold's Fall From Grace

NEW YORK ( TheStreet) -- Gold's stunning 9% drop on Monday has many declaring that the yellow metal's 12-year bull run is officially over. In the past year, the price has fallen nearly 16%, and now stands at the lowest level since February 2011. Technicians will tell you that the gold price chart looks downright ugly, and that there may be further damage done in the near future. That may well be true, but my perspective on gold is a bit different.

First of all, gold is not an investment, in my view. It's insurance against uncertainty, a hedge against inflation and a store of value. In times when there is little uncertainty, and inflation is not a threat, you would expect the price to be relatively low as it was for much of the late 1990s.

As an investor, you'd hope for those conditions, because all in all, it would signal economic stability, rising markets, and solid performance from your portfolio. With gold representing a small piece of that pie, investors would happily accept falling gold prices in exchange for growth in the other asset classes in their portfolios.

GLD Chart GLD data by YCharts

However, I don't believe that we are living in times of great certainty. There are many clouds on the horizon, both economic and other world issues. I also don't believe that inflation is at bay. Despite what the CPI tells us, as consumers, we are well aware that we are paying more for many things needed to sustain our lives.

Perhaps via mortgage refinancing we've been able to cut our housing costs, but rates won't stay this low, artificially I might add, forever. It's difficult to imagine a scenario in which interest rates don't explode at some point in the next several years. The Fed has been pumping and printing for years, deficits are exploding, and one of the few ways out of this mess will be via inflation.

All that being said, I doubt that gold's selloff has anything to do with a reduction in uncertainty, or the assumption that inflation will not rear its ugly head. More likely it was due to the speculation that Cyprus was planning on selling off some of its gold reserves, and that other European nations may need to follow suit.

With China's economy slowing, it is also believed that demand for gold there (Chinese citizens have been permitted to buy and sell gold for several years) will also slow.

Furthermore, gold has never been more liquid than it is now due to ETFs, and selling is easy. So, investors panicked on Monday; speculators were forced to close positions, and the rest is history.

If you buy into the notion that gold is an inflation and/or uncertainty hedge, and want exposure to the metal, it should represent a small piece of your portfolio but not the core. If you believe that we are not out of the woods yet in terms of inflation, it should remain a part of that portfolio.

There's likely to be more volatility in the yellow metal in the near future, but I believe that the case can still be made for the longer term. I would not want to speculate shorter-term, though. And, if we do enter a period of solid economic growth, and little uncertainty, I would not be unhappy to see the price of gold fall. But we are certainly not there yet.

At the time of publication the author held was long gold.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.