Gold Holds Its Investment Value, Silver Crashes

Somewhere in a secure vault deep underneath New York City, the University of Texas now stores 6,643 bars of solid gold — worth close to $1 billion — as part of the school's $20 billion endowment portfolio.

See also: How safe are your savings?

And the university's investment managers aren't alone in their renewed fever for precious metals. Individual investors around the world, including many saving for retirement, continue to load up on gold and silver.

Investing in precious metals can be a risky proposition: After a rapid run-up, silver reached almost $50 an ounce in late April, then went into free fall. Today it's fetching about $37, meaning that lots of people lost heavily. And in past years, gold has had its up and downs.

Many precious-metal investors buy because they believe that long-term inflation is headed our way and that owning metals is the way to protect against higher prices.

Inflation fears are being fed by promises from Federal Reserve Chairman Ben Bernanke to maintain record-low interest rates to stimulate the economy and by his central bank's continued printing of more dollars.

Even as Bernanke was holding his first-ever press conference in late April, gold futures hit a new all-time high, with a contract for delivery in June — one of the standard measures of gold's value — reaching $1,531.70 an ounce during trading in Asian markets.

A hedge against inflation

Investors usually swarm to gold and silver in times of economic uncertainty. The thinking goes that precious metals have special ability to maintain their "store of value" if the nation's currency loses its value and prices head up.

"Our dollar is losing value," Peter Schiff of Euro Pacific Capital argued on CNBC recently. "There is a connection between the rising price of food, the rising price of gas and all the money that the Federal Reserve is printing. The government is not raising taxes. Instead they are creating inflation."

The Federal Reserve argues that with unemployment holding at about 9 percent and many factories operating at less than full capacity, there is plenty of time and room for the U.S. economy to expand before there's a long-term danger of inflation.

But gold bugs don't give much credence to the central bank's claims, and have continued to buy gold, pushing its price up. So far this year gold has gained nearly 8 percent and continues to trade close to $1,500 an ounce. The run-up extends a decade-long gain.

Next: What about silver? >>