Times are quite unsettling out there. We have a global credit crunch that has banks refusing to lend to each other. Financing for capital projects or mortgages is becoming scarce and bank failures have become almost commonplace in the United States.

Many investors have been making the switch to gold in this uncertain environment. Gold tends to glitter brightest in times such as these. Gold has some good stuff going for it. Gold stubbornly resists currency devaluation and it will hold its value in the face of runaway inflation. Gold tends to rise in value when things look the bleakest.

While you might be tempted to cash out and head to gold, there are a few things to think about along the way. The first is that gold produces no income or earnings. This means that, while it is a good hedge against disaster, it tends to lose value in the good times.

Investors might be forgiven for taking the view that good times are not coming for a long time, and they will accept, what seems like a slight risk today, that their gold will drop if the sun comes out again. The price risk of gold, however, is a big one and not to be taken lightly. The price of gold has ranged from $400 an ounce to $1,000 per ounce over the last 25 years. It is creeping towards the $1,000 per ounce at the moment, and this moment just happens to be the peak of our collective anxieties about capital markets.

An investor going to gold today may feel safer, but they also run the risk of having their capital decline some 40 per cent and then stay down, possibly not earning any income for a long period of time. At the same time, if gold is down, other markets are likely rising. The investor fully committed to gold is now watching whatever investments they sold climb back out of today's market bottom.

Gold can be a useful part of a well-diversified portfolio, but selling a diversified portfolio to commit all of your assets to this commodity should be viewed as a high-risk venture. It is not a conservative strategy.

Those investors determined to go somewhere might consider an alternative. The government of Canada offers real return bonds which share some of gold's defensive characteristics. Real return bonds have their capital and income increased by the rate of inflation on a quarterly basis. This makes these bonds, like gold, a good hedge against currency devaluation and high inflation. Unlike gold, they will produce income and have a more limited downside when capital markets recover.

Whether you are tempted to add gold or real return bonds to your portfolio, the best view to take, in my opinion, is the one attributed to Richard Thaler, a professor of behavioural science and economics from the University of Chicago Graduate School of Business.

Mr Thaler's advice is to "choose a sensibly diversified portfolio and then stop reading the financial pages. I recommend the sports section. I don't want to be tempted to jump because I think I'd be more likely to jump in the wrong direction than the right one."

Alan MacDonald is an investment adviser who helps high-tech entrepreneurs make smart decisions about money. Contact Alan at alan.macdonald@rpfl.com or through www.alanmacdonald.ca.

Richardson Partners Financial is a member of CIPF.

To read more Business Matters articles from Alan MacDonald, click on http://www.ottawabusinessjournal.com/businessmatters5.php