History can show us that in bad economic times investors turn to gold for protection against inflation and falling currency prices. Gold is a commodity with a measurable unit of value, keenly sought after because of its unique characteristics.
The primary reason why we now see the price of gold at over $1,050US per ounce is because the US dollar is falling in value. When you print more money, it lowers the value of the existing currency already circulating. The US has been doing a lot of money printing lately; to get out of the hole they dug for themselves with credit mismanagement.
While the price of gold has been increasing in US dollar terms, it has remained steady or fallen in those countries where the currency has appreciated against the US dollar. Take the last 12 months for example (Nov 08 - Oct 09). The price of gold in US dollars has risen from approximately $750 to $1050. That's an increase of 40%. In Australian dollars the price in November 2008 was approximately $1150, which is where it is currently trading at today. This is a clear example of the US dollar losing value against the Australian dollar.
Inflation is the other main reason why gold increases in value.
Investing in gold has always been a popular and preferred method to use as a hedge against inflation. The global financial crisis has effectively stopped inflation in its tracks, but along with any recovery comes growth, and with growth comes inflation. Raising interest rates is an effective way that governments use to control inflation and we have seen the first signs of a global recovery when Australia lifted its official interest rate recently.
There are many ways that an investor can invest in gold. The popular method is buying gold bullion where you can have a direct and measurable exposure. This will come at a premium, but you have a commodity which can be traded globally.
Investing in companies which produce gold is also a popular way to gain exposure. Gold exploration and production is actively being carried out across the globe and there are many choices when it comes to buying shares on the stock market. From solid reliable companies with proven resources and consistent production, down to speculative exploration companies hoping to make the next big discovery.
My preferred method is to find it yourself. All you need is a reliable metal detector, and then head to some proven gold fields. It's a lot of fun and a whole lot cheaper than buying it.