Gold futures surged to an all-time high above $880 an ounce Tuesday as traders bet that rebounding oil prices would boost demand for the metal as a safe haven investment.
An ounce of gold for February delivery climbed as high as $880.40 an ounce on the New York Mercantile Exchange, easily breaking its previous record of $875 set in 1980. Spot gold also rose to a fresh high, hitting $876 an ounce to beat the high of $869.05 it hit last week.
Still, when adjusted for inflation, gold remains well below its all-time high. An ounce of gold at $875 in 1980 would be worth $2,115 to $2,200 today.
Gold has soared in the past year, boosted by rising prices for oil and other commodities and by the falling U.S. dollar.
Those trends have increased the metal's appeal as a hedge against inflation. Gold also is seen as a safe investment in times of political and economic uncertainty around the world.
Growing demand for gold jewelry in India and China has contributed to higher prices over the past several years.
But analysts weren't predicting a relentless march higher for gold; they said a corrective sell-off could follow its spike.
"Gold traders see some resistance near $880 and $890 and are probably mindful of the large number of long positions in the market, but that is not stopping them from trying to test the highly rarefied air found at these levels," Jon Nadler, senior analyst at Kitco Bullion Dealers, wrote in a note.
Here are some questions and answers from experts about what the metal's record high means for individual investors.
Q. Should I invest in gold?
A. Putting money in precious metals such as gold can be a smart way to diversify your portfolio, particularly as a hedge against inflation. Over the long term, gold, one of the world's oldest forms of currency, is likely to hold its value.
"Gold is becoming an increasingly important part of anybody's portfolio," said Ashraf Laidi, an analyst at CMC Markets. "It shouldn't be seen as this obscure asset held by people who think the world is going to end tomorrow."
In the short term, however, gold can be volatile. Gold prices traded in a range of almost $250 last year, and that's expected to rise by $75 to $100 in 2008, according to Nadler.
Q. How can I invest in gold?
A.You have a few options. Individuals can put money in an investment vehicle tied to gold or buy the physical metal, in the form of gleaming yellow bars and coins.
One choice often recommended for individual investors is a gold futures exchange-traded fund, or ETF, which essentially tracks what traders expect the price of gold to be at a later date. Another is a gold bullion ETF, which tracks the price of physical gold in the commodities market.
A prudent choice for inexperienced investors is to buy into a mutual fund that has some exposure to gold. That way, you benefit from jumps in gold prices but don't go belly up if the market takes a dive.
Another option is to invest in mining companies, either through an index fund that tracks mining companies or by buying individual company stock. These investments have lower tax rates than gold ETFs, but investors are at the mercy of labor or management problems.
You could consider buying physical gold, which is the most direct way to take advantage of rising values. That involves contacting a bullion dealer who will ship to you gold bars or American Eagle coins produced by the U.S. Mint. But your gold will need a home, such as a locked safe or a safety deposit box at a bank, said Donald Doyle, chairman and CEO of bullion dealer Blanchard and Co.
"You could always bury it in your back yard," a preferred location for some clients, he said. Costs to store and insure your gold, however, can eat into profits you make on its rise in value, and you won't earn any interest on it.
"It's safe, but it has the disadvantage of transaction costs and the risk of putting it under your pillow," Laidi said.