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(MoneyWatch)  Here’s to a gutsy call from Wells Fargo Private Bank, which told clients in no uncertain terms this week that “interest in gold investing has reached the level of a speculative bubble.”

That’s right: they used the “B” word — and they’re sure to get plenty of grief over it. Such is the ardor of the gold bugs.

True, gold prices have risen to $1,800 an ounce from $1,600 in less than a month, and plenty of canny strategists say the precious metal could easily hit its real all-time high of $2,400 in the not-to-distant future.

But the team at Wells Fargo Private Bank (WFC) would rather call it a bubble now and maybe miss some upside than let their clients suffer potentially catastrophic consequences.

“As with all bubbles, we know that we run the risk that our view may turn out to be wrong (‘early’ would be our preferred euphemism) in the short run; however, we believe that we will be proven right in the long run,” says Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank, in a report to clients.

Warning Signs 

Among the many credible reasons for steering clients away from gold, one that stands out is historically gold prices have also been known to go down — and to do so with great volatility. As Davidson says:

With very little warning, the bottom can drop out on gold prices very quickly. For example, during six short months in 2008, gold lost more than 30 percent of its value. In the 1980s, in a little more than two years, the price of gold dropped approximately 65 percent. When fear subsides, inflation doesn’t skyrocket, and everything begins to return to ‘normal,’ demand for gold can fade away quickly.

Additionally, because gold offers no yield, no earnings, no cash flow, rising prices are driven by so-called Greater Fool dependence. “Investors in gold are hoping that other investors will come along to bid up their holdings in the future,” Davidson says. “While a common tactic of speculators, the ‘greater fool’ approach is rarely a good long-term investment strategy.”

In another salvo, the strategist says gold’s inflation-fighting properties are greatly overstated. Although it’s true gold’s been in a bull market for more than a decade (while stocks have gone nowhere), over longer periods of time equities have outshone gold by a brilliant margin.

Have a look at this chart, courtesy of Wells Fargo Private Bank, showing the inflation-adjusted cumulative returns for the S&P 500 and gold going back to 1985. Stocks (the green line) are up more than 500 percent, while gold (the blue line) has returned about 125 percent.

Indeed, as we’ve noted, stocks and commodities in general benefit from various degrees of inflation most of the time.

To that end, “gold is a commodity that should be held as a part of a larger, diversified allocation to commodities that is frequently rebalanced,” Davidson says. That’s a view we’ve echoed when gold topped $1,500 and $1,600 an ounce earlier this year.

But let Davidson have the last word:

“Investors should maintain the appropriate allocation to gold, and understand how gold fits within a total portfolio strategy. We believe this offers a more prudent strategy to address economic uncertainty and inflation rather than succumbing to the pressure to jump on the gold bandwagon. Time will tell if we are right or just ‘early.”

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