Think gold’s rally is unstoppable? It certainly seems that way these days. But before diving into the SPDR Gold Trust (NYSE:GLD) — or diving in any further — you might want to digest some gold realities that can be adequately described only with pictures. You might end up being a little less impressed.

Gold — What Is It Good For?

Have you ever really taken a close look at what we’re doing with all that new gold we dig up each year? Obviously, jewelry and investments are in the mix, with even a smattering of electronics usage. The specific allocation might be surprising to some, though, particularly when compared to how other precious metals (let’s just focus on platinum and silver for now) are utilized. Take a look at what the world used across all the major precious metals for last year.

At first glance, it all might seem normal. But a couple of things stick out if you look long enough:

• The biggest piece of the gold pie caters to vanity, whereas platinum and silver are mostly devoted to industrial, revenue-generating purposes.
• Not that silver isn’t catching up (and not that platinum isn’t now starting on this path), but nearly 40% of new gold production of late has been put into the hands of the financial industry or central banks, either as bullion, or owned through exchange-traded funds.

The first red flag — 51% of gold still being used to make jewelry — is at least moderately alarming to gold owners simply because another recession could dramatically crimp demand again, as we saw in 2008. It’s the second item that’s downright scary, though: That nearly 40% of gold ultimately is controlled by only two type of entities, each of which is holding it for the exact same reason.

The implication is the swelling demand that has made gold such a red-hot commodity could just as quickly turn around and send gold prices south again — if all these buyers have a sudden change of heart. To really appreciate the scope of that possibility, take a look at how gold’s usage has changed not just since 1990, but just since 2005.

Quite a shift, huh?

Calendar Correlation

Now, before letting that snapshot out of your head, take a look at how gold prices have progressed between 1990 and 2005 (when gold investing was growing but still not mainstream), and between 2005 and 2010 (when investing in gold was all the rage). Bear in mind, the SPDR Gold Trust started trading in late 2004, with other similar ETFs not far behind.

You see where this is going? Hold that thought for just a tad longer.

Self-Fulfilling Prophecy?

There are a couple of justifications for all the gold clamoring. One is the “hedge against inflation” argument, and the other is the “the demand is truly growing” argument. Let’s address the second one first: demand.

Here’s a look at the global demand trends since 2001, through 2010, for the four major uses — jewelry, bars/coins, ETFs and industrial applications. Once again, see anything interesting?

If the financial industry and the like are offering more gold-based products because the demand for gold is growing, where is it growing besides the demand being created by that very same financial industry? Industry-usage growth has stagnated, and jewelry demand actually is well off peak levels. The only real growth in demand is coming from more and more consumers of gold bars, coins and ETFs assuming there’s growing demand other than their own. And, the bulk of that increase is coming from one place — China.

China’s gold consumption was up 32% in 2010, yet with most of that gold being used to make jewelry — the one thing that’s kept the gold jewelry market from looking comically weak. Don’t be fooled, though, as China also is stockpiling gold bars. It was the world’s largest purchaser of raw gold in Q1 and has almost single-handedly kept the uptrend in gold bar consumption going since 2008. How long until enough is enough? Great question.

So, let’s not mince words here. The statistics suggest the only thing fueling the gold craze is the craze itself, and it’s largely fueled China. It can be great for a while (years, obviously). Eventually, however, it will turn into a vicious catch-22, especially if and when China changes its mind.

The Inflation Hedge That Rarely Is

This brings us to the last justification for the monster rally in gold prices — the hedge against inflation.

There’s actually a little bit of historical precedence in owning gold as a way to keep up with rising prices. That relationship, however, has been morphed almost to the point where it’s not recognizable.

Let’s call a spade a spade. Gold is no longer a hedge a hedge against inflation. It was a hedge against inflation. It is now a speculative bet on inflation.  It has been since — you got it — around 2005. Investors have been pouring into gold-based holdings for a few years now, assuming rampant inflation was right around the corner. Ironically, though, the only area where we’ve seen rampant inflation is in the price of gold. Even that might be about to wind down, however.

Just to provide a little perspective on how skewed the gold rally has gotten, compare the percentage change in gold prices over the past few decades to the actual percentage changes of the Consumer Price Index (not the inflation rate — the actual index).

If gold is an inflation hedge, it’s a lousy one.

While it wouldn’t be fair to expect a perfect correlation between gold and the CPI, it should be more reliable than this. Remember, a hedge is an offset — nothing more. Holding gold failed to offset inflation between 1990 and 2000 but more than made up for lost time since 2002.

The concern here is just that gold’s price rally is now well beyond even the most conceivable of possible inflation scenarios, thanks to more frenzy than reality. One has to wonder if we’re setting up for a repeat of 1980, when gold was flying and everyone thought it was bulletproof — right before it crashed. And yes, traders were saying “this time it’s different” back then, too. The only difference between now and then is that a whole lot more amateurs are in the dance now.

Bottom Line

With all that being said, it’s still not easy to say gold’s a poor investment. Any investment that moves higher is a good one, and this euphoria could keep prodding the metal higher whether it makes sense or not.

It does force the question of timing, though: How much longer can the uptrend last when there’s really nothing fueling it other than perception?

If you’re in the SPDR Gold Trust, or even just thinking about GLD, it’s time to at least start asking questions. Someone in this poker game is going to call soon.