Gold is a frustrating investment, even for its proponents.  Actually, “disciple” is probably a better a better word for the truly-committed gold investor.  More than any other asset class, gold tends to create a quasi-religious cult around itself.  An investor might buy a stock.  But they believe in gold.

Unfortunately, gold is often the god that failed.  It is billed as a “crisis hedge,” and in the lead-up to a crisis it tends to do well.  But when the crisis actually hits, gold tends to behave like any other traded risk asset.   This is more true today than in years past because of the popularity of gold ETFs, such as the popular SPDR Gold Shares (NYSE:$GLD) and other exchange-traded options favored by hedge funds and retail investors alike.  Gold has become more correlated to the stock market because now gold is the stock market.

As an “inflation hedge” or “currency hedge,” gold tends to hold its ground a little better.  But during times of macroeconomic stability it tends to lose its appeal.

As you might have guessed by now, I’m not the biggest fan of gold, particularly as a long-term investment.  It’s difficult for me to like an asset that pays no interest or dividend and has little real industrial value.  Your return on a gold trade is purely dependent on your ability to sell it to someone else at a higher price, and that bothers me.  If you buy an income-producing asset—be it a stock, bond, rental real estate, mineral rights, oil and gas royalties, a small business, etc.—you can realize a return irrespective of Mr. Market’s mood that day.

That said, gold can be a profitable trade if you are able to maintain your objectivity and not get wrapped up in the cultish ideology that tends to surround the barbarous relic.

All else equal, I would expect gold to perform well under the following set of circumstances:

  1. Loose monetary policy
  2. Sentiment neutral or bearish among individual investors
  3. There is the fear of a crisis, but the actual likelihood of a crisis hitting is small

Today, Condition 1 certainly holds.  The Fed is experimenting with the loosest monetary policy in history.  Just this week, Bernanke announced that “QE Infinity” was being expanded beyond the original $40 billion per month in mortgage securities to include another $45 billion in Treasuries.  And short-term rates would be held at virtually zero until the unemployment rate dipped below 6.5%.

Condition 2 is a little hazy.  Gold sentiment reached what I would call (in professional terms, of course) the “nutty loony” phase of bubble sentiment about two years ago.  Gold was all anyone wanted to talk about.  Since then, sentiment has settled down.  I wouldn’t call sentiment towards gold bearish by any stretch; this week the Financial Times reported that sales of American Eagle gold coins soared by 131% in November as investors feared the worst from renewed government gridlock and the ballooning debt.  But I would say that sentiment is on the slightly-bullish side of neutral.

I expect to get a little hate mail for my views on Condition 3, but I do not see any major crises hitting in 2013.

I know, I know, there is the fiscal cliff issue.  And the possibility that Europe might blow up…or that the recovery in China misfires…or that Japan’s day of reckoning finally comes

Any of these could happen, and the fear that they might happen is bullish for gold.  But I’m betting that the fiscal cliff crisis gets resolved by early January, that Europe muddles through, and that Japan’s day of reckoning is still a year or more in the future.

While I have laid out a modestly bullish case for gold over the next 6-12 months, I still don’t recommend it for most investors.  I see gold drifting higher in 2013, but I expect several other asset classes to perform much better.   With domestic energy production booming and interest rates near the lowest levels in history, I expect to see Master Limited Partnerships enjoy a monster rally.

I also expect European and emerging market stocks to have a good run, and U.S. stocks should have some life left in them too.

Gold will probably outperform bonds…but then, at current yields, begging with a soup can in front of the subway will probably be more profitable than investing in bonds.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. This article first appeared on InvestorPlace.

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