Should you buy gold now?

The price of gold hit a new closing high Wednesday. Does that make yellow metal a buy?

Maybe, if you think the European debt crisis is going to turn into something really awful and that inflation will really take over.

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Otherwise, there are good reasons to be cautious about it. 

The spot price of gold closed on Wednesday at a record $1,242.70 an ounce, up $22.80 on the day. The high price, also a record, was $1,246.50.

But profit-taking set in electronic trading overnight, and gold was off $6.50 lower.

Still, gold is up nearly 390% since the end of 1999; the Dow Jones industrials ($INDU) are down 6.5% over the same period. Gold is up 11% so far in 2010, compared with the Dow's 3.1% gain.

And gold has been rising rapidly this decade not just because investors want safety from the oddities of the stock and bond markets. Political uncertainties have raised gold's appeal.

Here's what you have to consider:

Does the price of gold represent anything more than speculative frenzy? Gold enthusiasts tout it as the ultimate inflation hedge or the ultimate hedge against the collapse of the euro.  Maybe, but the price chart of gold looks like the price chart of home prices of only a few years ago. If inflationary pressures erupt, such as the global economy saw in the last 1970s, you can bet every central bank in the world will ratchet up interest rates to cool off their economies. Gold hit $800 an ounce in 1980 amid the same kind of hype and dropped by 75% after interest rates soared to record levels.

Is the inflation threat real? It may be for gold, possibly for crude oil. It hasn't been for real estate, corn or stocks. With U.S. unemployment above 9.5%, labor cost pressures are nil. The 10-year Treasury yield was 3.54% on Tuesday, down slightly from Monday and down from 3.84% at the end of 2009. 

If the European debt crisis spirals out of control, the global problem won't be inflation. It will be a deflationary crash, and commodity prices will fall along with just about everything else. That includes gold.

Gold prices can move around because supplies abruptly hit the market. In the 1890s, farmers and others wanted the United States to leave the gold standard because it was depressing land and crop prices. At the same time, huge new South African discoveries were made, and gold prices crashed. Farmers then enjoyed one of their greatest periods of prosperity.

There have been better investments than gold. Silver and platinum are up 14% this year, for example. 

While gold is up 390% since the end of 1999, Apple (AAPL) is up 967%.

It is possible that the pundits are right. Gold will move, say, to $2,000 an ounce. It may take four years to get there, assuming the price rises 16% a year.  How do you get in on it?

You can buy the gold, which means you need to find a bullion dealer.

It's probably easiest to buy shares in an exchange-traded fund that buys bullion. Your choices include the Gold Trust SPDR (GLD), the iShares Gold Trust (IAU) or, say, the PowerShares DB Gold Fund (DGL). All three are up a bit less than 13% this year.

Of these ETFs, the Gold Trust SPDR is the big player. It currently owns some 1,200 tons of gold, all of it parked in a London bank vault. The holding is the sixth-largest in the world, according to the World Gold Council, ahead of China and behind France.

You can buy shares in gold mining companies. These would include Barrick Gold (ABX), Goldcorp (GG), Yamana Gold (AUY), Freeport-McMoRan Copper & Gold (FCX) and Newmont Mining (NEM).

But beware. They may not move in lockstep with gold.

Goldcorp is up 17% this year. But Yamana is up only 0.1%. Barrick Gold is up 16.5%. Freeport-McMoRan is down 12.5%. Newmont is up 23%.