There is a saying in China that if you have gold, your family will never go hungry. There's a reason why in countries like China and India, where famines, hyperinflation and civil wars have riddled the historical landscape for centuries, people have traditionally bought gold as an insurance policy. Today, many Americans are also stocking up on gold-so much so that HSBC in Manhattan recently told clients that its vaults were full and it was trucking their holdings to warehouses in Delaware and Idaho. But with the shiny stuff priced at record highs, does investing in gold make sense now?

"Unless you think we're headed for a true disaster, like a major terrorist act, another economic crisis, or a dollar collapse, there are better ways to hedge, such as bonds or foreign securities," says Paul Zemsky, senior vice president and head of asset allocation at ING Investment Management.

But gold fever continues unabated, driven in part by the news that India's central bank recently bought 200 metric tons of gold (a nine-by-nine-foot cube) from the International Monetary Fund and that the central banks of China and Russia are buying up gold to diversify their dollar reserves. But while 200 metric tons is almost double the world's annual gold production, it is just a small fraction of all the gold extracted through the ages (gold, once mined, almost never disappears), and China holds only 2% of its reserves in gold. As Tim Knepp, CIO at Genworth Financial Asset Management in Encino, Calif., says, "There is plenty of supply of gold available and no likelihood of a shortage."

INFLATION FEARS

It's not just amateurs or small investors involved in the current gold rush. Recently, hedge fund manager John Paulson, who famously made a hugely successful early bet against subprime mortgages, announced that Paulson & Co. was launching a gold fund to bet against a tanking dollar. He has warned about countries printing massive amounts of money and predicts that as the dollar falls, central banks will add to gold stocks to replace the dollar as a reserve currency, and demand will outstrip supply.

"We see some pretty sophisticated investors saying they want gold," says Erik Davidson, senior director of investments at Wells Fargo Private Bank. "Well-traveled people who see the U.S. economy on a relative decline are worried too." Smaller investors who watched their retirement funds shrivel last year and who remain worried about equities and inflation, are also looking to gold as a safer alternative. What should bank reps recommend?

"There's a very basic question to ask a client up front," says Knepp. "Are you here to see me because you see gold as a return opportunity, or are you here because you want gold as part of your portfolio diversification?" Advisors also need to know the client's risk tolerance because gold is a very volatile commodity that can move rapidly, he says. "If this is someone who's invested in treasuries or CDs, you don't want to have him suddenly investing in a lot of gold or gold stocks!"

If someone is hoping for a nice return on gold or for a secure store of value, now is probably not the best time, says Knepp. Sure, gold has been much higher in value, in terms of constant dollars, than it is today ($850 per ounce in 1980, would be equivalent to more than $2,300 per ounce today). But with gold up 32% for the year as of late November, and at an all-time high in current dollars, it's pretty frothy.

INFLATION FEARS

What about the slumping dollar? Most analysts say that fears of a dollar collapse are overrated. The greenback has been slipping against many currencies, but so far, it seems to be a controlled fall. The U.S. treasury and countries that hold large reserves of U.S. currency or dollar-denominated bonds are managing dollar exchange rates. Moreover, china, which has one of the largest dollar holdings, isn't interested in dumping the greenback and causing a crash, since china's economy depends on continued exports to the U.S. as one famous dictum goes: "If you owe a million dollars to the bank, the bank owns you, but if you owe $100 million to the bank, you own the bank."

Inflation in the U.S. is a legitimate concern, given the trillions the Federal Reserve is spending. But gold is probably not the best hedge against inflation, and inflation usually shows up only two or three years after a big boost in the money supply. Far better would be foreign equities and bonds, and a broader mix of commodities.