Gold is currently trading at around $1,183 U.S. an ounce. That’s up 4% from April 19, 2010, when it was trading at around $1,138 U.S. an ounce, but still short of gold’s all-time high of $1,214.80 U.S., which it reached in late 2009.

Gold’s recent rise has partly been driven by investor fears about European sovereign debt — Greek debt in particular. These fears are prompting more investors to buy gold and gold investments, because they believe gold will provide them with additional security.

Further European debt problems would push gold up even further

The European Union and International Monetary Fund have come to an agreement on a $150 billion (Canadian) bailout package for Greece. However, other so-called PIIGS countries (Portugal, Ireland, Italy and Spain) also suffer from high budget deficits and large public debts.

For example, Spain’s national debt is expected to rise to 66% of its gross domestic product (GDP) in 2010 and 74% in 2011. Moreover, the country faces a 17.4% unemployment rate, and the Spanish economy is growing at a rate of only 1% a year.

If any of these governments are forced to restructure or default on their debts, European and international banks that hold their debt could be forced to take huge writedowns. That could further destabilize the euro, one of the world’s major currencies.

That could prompt even more investor interest in gold investments, and drive up the price of gold even further.

Use caution when making gold investments

We feel gold could well move higher over the longer term, although we expect it to remain volatile. Rising gold would mainly be driven by investor fears that low interest rates and government stimulus spending will spur inflation. A continuing European debt crisis would just add to gold’s rise.

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Conservative investors should be careful when making gold investments, as they would be with any volatile commodity investment. Further, gold should only make up a modest part of the resources segment of your portfolio.

Stocks make better gold investments than bullion

We think the best way to invest in gold is through gold stocks. We recommend staying away from buying gold bullion, coins (unless you collect them as a hobby), or certificates representing an interest in bullion.

Like bullion, gold stocks benefit from increases in the price of gold. But unlike bullion, which comes with a continuing cash drain for management, insurance and so on, gold stocks have the potential to generate income.

Newmont Mining (symbol NEM on New York), is a good example of a high-quality gold stock. We analyzed Newmont in a recent issue of Wall Street Stock Forecaster, our newsletter that focuses on the U.S. stock markets.

Newmont’s high-quality mines should last for decades, and its costs are coming down. As well, most of its production is in politically stable areas, such as North America and Australia.

The company’s gold production should rise 5% to 10% in 2010. That’s mainly because of its new Boddington gold mine in Australia, which started operating in July 2009. Boddington’s reserves should last over 24 years.

The rapidly changing situation in Europe is one of a number of factors we take into account when we analyze gold and other types of U.S. investments in Wall Street Stock Forecaster. Click here to learn how you can get one month free when you subscribe today.