KEY POINTS:
A decade ago, pundits forecast the "death of gold". Banks started closing their gold trading desks as prices seemed to be on a downward spiral.
Investors were swept up in the dotcom craze. Putting money into a yellow metal that had few practical uses and didn't promise big gains didn't make sense.
The glory days were over. The fascination and desire for gold, which had inspired films such as Goldfinger and The Italian Job, would, it seemed, become a thing of the past.
Yet today, the glamour of - and clamour for - gold is well and truly back. Since September, prices have increased by more than a quarter. At the start of the year, they broke through the previous record, set in 1980, of US$850 ($1120) an ounce (there are 400 ounces in a bar). And last Monday, prices soared above US$900 an ounce, though they fell later in the week.
The credit crunch and the resulting uncertainty on the financial markets is a big reason for the renaissance. The events of the past six months have exposed the frailty of the whizzy, fiendishly complex investments being punted by finance houses
For investors stung by losses from backing structured investment vehicles and "covenant-lite" loans, a bar of gold bullion seems reassuringly safe.
Indeed, according to the Summers-Barsky theory - named after the two Harvard professors who came up with it - there is an inverse relationship between gold prices and other investment returns. In other words, when equity returns fall, the price of gold tends to rise.
Ian McNeil, head of sales and marketing at commodities investor ETF Securities, says: "The financial system has lost a lot of discipline, selling products which have an uncertain value. You can always be sure of gold"
Graham Birch, head of fund manager BlackRock's natural resources team, with more than US$45 billion in assets under management, adds that, unlike a share or bond, investing in gold does not depend on a company's performance or a government's ability to repay a lender.
"Gold is one of the few assets you can buy which is not a liability against someone else's balance sheet," he says.
Currency investors who would normally buy dollars have also been piling into gold because of the dollar's weakness.
With the US Federal Reserve expected to cut interest rates in an attempt to stave off a recession, and the enormous budget deficit, a recovery for the greenback is unlikely, making bullion seem a good alternative.
According to figures from gold specialist consultancy GFMS last week, investors bought almost as much gold in the second half of last year as they did in the whole of 2006.
In the third quarter last year, they bought a record amount of gold, twice as much as during the same period the previous year. September - which is seen as the start of the credit crisis proper - was by far the busiest month: three times as much gold was bought using exchange-traded funds, which track the price of gold, than in July. Analysts report that the wave of buying has been even stronger this year as the economic gloom deepens.
McNeil says that ETF Securities invested US$400 million in one security tracking gold between August and Christmas. In the three weeks since Christmas, another US$200 million has been invested.
Gold is a bizarre commodity. It cannot be eaten, like its agricultural counterparts, nor can it be used for fuel, like crude oil. Because of its value, it gets recycled; once it has been mined, almost all gold remains in circulation. According to GFMS, there are around 160,000 tonnes of it in circulation.
Of this, just over half is thought to be in the form of jewellery and about a fifth is held in central bank vaults. The remainder is held by private investors, used in electronics (such as in semiconductors) or ends up in people's mouths in the form of fillings.
Production is tiny, amounting to 2444 tonnes last year, about 1.5 per cent of the total known to exist.
Production has flatlined for the past decade and analysts do not expect a big increase soon because it takes at least five years from discovering a seam to get a mine producing gold.
Peter Hambro, executive chairman of Aim-listed Peter Hambro Mining, says, tongue in cheek: "When gold reached US$900 an ounce, I started to wonder if maybe we should just leave unmined reserves in the ground."
More gold continues to be bought for jewellery than by investors, though the gap is narrowing. In the third quarter last year, investors spent about half the amount on gold than that spent by jewellery makers, whereas in 2006 they spent only about a quarter.
The amount of jewellery bought in the third quarter last year was 6 per cent higher than the same period in 2006. Yet the largest market - India - saw a huge fall in demand, partly because many people can no longer afford to buy so much of it.
This drop-off, however, was offset by increasing consumer spending power in places such as the Middle East and China.
Ironically, the surge of investor enthusiasm which is propelling gold prices to record levels is pricing many of those who have practical need for gold out of the market. The ability of customers to pay for jewellery is one factor that could dampen price rises.
The question now is where gold prices will go next.
Paul Mylchreest at broker Redburn Partners reckons that they will hit US$1500 an ounce by 2012.
This figure sounds startling, but does not seem so outlandish when the previous record of US$850 an ounce in 1980 is adjusted for inflation; it comes to around $1790. That means there's a long way to go before current prices break the record in real terms.
Whether gold will go this far depends in large part on whether the dollar continues to weaken, global stock markets recover and inflation is curbed. Gold prices tend to be more volatile than stock markets and investing is not without its risks. The general rule is that when times are good, gold prices generally do badly, and vice versa.
BlackRock's Birch takes issue with the inference that high gold prices are therefore a bad thing: "When commodity prices rise, the media do not see it as a good news story. Instead, it's something along the lines of: 'Commodity prices rise, inflation gloom."'
But with the credit crunch and inflation showing no signs of abating, it has to be a good thing that trusty old gold is available as an alternative investment.
GOLDEN MOMENTS: A HISTORY
Pindar, the celebrated Greek poet born some 500 years before Christ, wrote: "Gold is the child of Zeus, neither moth nor rust devoureth it."
The first discoveries of gold used by man date back to around 4000BC near the Black Sea, where decorative objects were fashioned out of the precious metal.
It was not until around 700BC that gold was used as a currency.
Merchants in what is now Turkey made coins out of it to trade their goods.
Later the Romans minted gold coins in the territories they had conquered. Gold-based coins remained common currency throughout Europe for centuries. Their value dropped by up to 80 per cent in the 16th and 17th century when a huge inflow of gold and silver from the New World - the Americas conquered by Spain and Portugal - flooded the market.
In the mid-19th century, the gold rushes to Australia and California dramatically increased supply. This helped bring gold jewellery within the financial reach of more ordinary people.
By the end of the 1930s, most countries had severed the link between the value of the precious metal and their currencies by abandoning the gold standard.
Advances in production techniques have meant that about three-quarters of all the gold ever produced was mined after 1910.
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