In response to my latest dispatch on investing in gold, several readers posted some great questions on the strategy. For example: what percentage of assets should be in gold, and at what point should investors get out?

It’s a very difficult question for asset allocators, notes Shayne McGuire, portfolio manager for the GBI Gold Fund of the Austin-based Teacher Retirement System (TRS) of Texas, who also is managing director and head of global research at TRS. "At a 2009 gold symposium, a renowned global strategist said it might make sense to hold 1 percent in gold — but only sometimes. Then I went to a Hong Kong presentation last fall and a precious metals strategist said the percentage should be anywhere from 10 percent to 20 percent."

"This shows how Asians think about gold as a savings instrument, while for the U.S. gold is seen as a speculative asset," McGuire reasons. "Quite often it’s coupled with end of the world or some horrible situation — the idea of owning it because of a disaster."

Gold performs well when it’s 1, 2 or 3 percent of a pension fund’s portfolio, he says.

Another reader comments, "Income growth will continue apace, as will dividend growth, while gold, producing no income, will be left in the dust and will increasingly be accumulated only by central banks."

gold scaleIn response, TRS’s McGuire says that a lot of people see it this way. "What you’re really buying is just rocks that don’t produce cash flow. But look at the correlation with the stock market — when stocks are doing well, like before the credit crash, gold was doing fantastically well, and when stocks were not doing well, right after the deluge, gold still does well. So you buy gold because its value increases."

Adrian Ash, head of research at BullionVault of London, looks at central bank sales: "When the gold price was at a 25-year low in 1999, central banks were dumping gold. Britain sold 400 tons, half its gold reserves, as did the Swiss and the French. Of course, this has ground to a halt now, but big central banks in Europe continued dumping gold — 500 tons in 2004. Not all central banks sold — Germany and Italy never did."

"But central banks were selling at the bottom, and starting last year realized that they wanted to hold onto what they have," Ash continues. "Now the price is up four or five times from what they sold their gold at. It’s the first time in 20 years that European central banks have been buying gold — Russia has been doing so for the past five years."