The Big Question: What is so special about gold, and should we all be investing in it?

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The Independent Online

Why are we asking this now?

The price of gold has gone back up above the psychologically important $1,000-an-ounce mark, proving that its status as a "safe haven" in the current global downturn is still powerful. This week's spike has its roots in the sliding value of the dollar, which has made a commodity denominated in the US currency particularly appealing to foreign investors.

But the last 18 months of turmoil have put gold on a long high. The price of gold always rises in times of economic uncertainty because it holds its value even when stock markets are plunging, banks tottering and inflation threatening. The price averaged $872 an ounce last year, a massive 25 per cent higher than in 2007, and it has risen another 13.6 per cent in 2009.

Who is buying it?

Normally most of the money spent on gold goes on jewellery. But the economic downturn has turned the market upside down, and now it is recession-spooked investors fuelling the boom. Financial investment in gold has more than doubled since 2007 and accounted for around half of all demand in the first six months of this year.

Meanwhile, gold jewellery-buying has dropped by nearly half and industrial demand by a fifth. All this demand has sent the price soaring. In March 2008, gold hit an all-time high of $1,032 an ounce.

Why do we like it so much?

The enduring fascination of gold is hard to pin down. Partly it is the glorious colour, partly the metal's relative scarcity, partly a set of physical properties that mean gold is easy to shape and yet never corrodes. Whatever the reason, gold has been associated with wealth, power and status for time immemorial.

Symbolically, it stands for everything from purity to avarice, from royalty to religion, from Frank Sinatra's strung-out junkie in The Man with the Golden Arm, to Shirley Eaton's all-over body paint in Goldfinger. Myth is littered with golden calves, golden fleeces and philosopher's stone. Gold has founded cities – from San Francisco to Johannesburg – but entire cultures have been destroyed by lust for it.

How long has it been around for?

Human beings have always been fascinated by the metal that the Incas believed to be "the sweat of the sun" and the Aztecs termed the "excrement of the gods". The oldest worked gold found so far dates from 4000 BC, in Bulgaria, which pushes the obsession with gold back into the Stone Age. Cultures across the world have followed suit. Egyptian hieroglyphics from as early as 2600 BC describe gold and golden jewellery also played a central role in the ancient cultures of Mesopotamia, Greece and Rome.

Where has most of it historically come from?

After the Witwatersrand Gold Rush in the late 19th century, South Africa dominated world gold production for more than a century and as much as half of all the world's gold was mined there.

It was only knocked off the top spot two years ago by China, where production has shot up by 70 per cent in the last decade, thanks to the country's rapid capital expansion and low labour costs. Last year, China produced nearly 300 tonnes of gold, compared with 232 from South Africa. Australia and the US are the other two big gold countries.

How do you get it out of the ground?

As with all minerals, methods of extraction have become more sophisticated as technology has improved. The traditional method is gold panning, standing in a river sifting through silt. Sluicing and dredging apply a similar principle on a more industrial scale, but are still only useful for so-called "placer deposits" found in streams or former-streams. Gold mining at scale was started by the Romans, using a hydraulic method. Nowadays, the majority of large-scale mining extracts gold from hard rock, either in open pits, if the deposit is near the surface, or by dropping shafts underground. The deepest mine, running up to 3900 meters underground, is in South Africa.

How much gold is actually out there?

A general estimate is that all the gold ever mined would form a single 20-meter cube. The metal is so valuable, and so stable, that it is almost always recycled and very little is lost. As a result, as much as 85 per cent of all that has ever been produced is still in circulation. Having said that, intensive modern mining has had a profound effect and three-quarters of the world's gold supplies are less than 100 years old.

The largest reservoirs of gold on earth are in the oceans, but the concentration is so weak there is no way to get it out. Space is an even bigger source. In 1999, a spacecraft analysing the Eros asteroid showed it contained more gold than has ever been mined on earth.

Where are the current reserves to be found?

In terms of reserves, most of the world's gold is in the United States. The biggest depositories are at the US Federal Reserve in New York and Fort Knox in Kentucky, which each hold about three per cent of the global total. But if jewellery is included the winner is India.

Indians buy 25 per cent of the world's gold every year, and a fifth of all the decorative gold thread produced is used in saris. The Middle East also has a vibrant gold jewellery trade, and China is also, unsurprisingly, a growing market. China is the only place in the world where demand for jewellery has gone up this year.

What is it used for?

Gold is not only stable, it is also unusually malleable and ductile. A single one-ounce piece – a little smaller than a sugar cube – can be beaten out into a translucent sheet five-millionths of an inch thick or drawn out into 50 miles of wire at one-tenth the diameter of a human hair.

Even now, one of the biggest uses of gold is still jewellery, but there are also a host of industrial applications, including wiring in electronics and as a thin anti-glare film lining astronauts' visors. Despite a long history of searching for its therapeutic powers, gold's main use in health is in dentistry.

How do I go about investing in gold?

There are two main ways to get into gold. One is to buy a lump of the physical metal, with a choice between bullion coins issued by governments, or "bars" that are typically 99.5 per cent fine gold and come in a range of weights. There are 94 accredited manufacturers in 26 countries.

If you have rather larger sums of money in mind, and are worried that your floorboards can't take the weight, there is also the option of buying into an exchange-traded fund (ETF), which tracks the global gold price. But simplest of all is to take out a gold account, where a company buys and stores the metal on your behalf. With savers penalised by non-existent interest rates and nervous about future inflation, the number of gold accounts on offer has rocketed in the last year.

Should we all be buying more gold?

Yes...

* The only thing you can't do with gold is eat it

* It is safe from the gyrations of the stock market, collapsing banks and the unforeseen consequences of quantitative easing

* With the proliferation of companies offering gold accounts, you don't even need your own strong room to store it

No...

* It might be safe, but gold is also an entirely static investment and gives you no income

* Arguably in the long run it will under perform those risky equities

* Today's prices look dangerously like the top of the market; those wishing to invest could get much better prices if they wait a while

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