How investors can take advantage of booming gold prices

What is the current price of gold and what has driven its growth?

One ounce of gold will cost you about US$872 ($1101). After hitting a record high of US$1032 in mid-March, the price has come back because of an improved US dollar, a stronger US economy and profit-taking.

However, over the medium term, the precious metal has risen more than 300 per cent since 2000, and last year the price of gold increased 30 per cent.

This year we've already seen it appreciate a further 10 per cent. Gold is historically seen as a counter-inflationary investment, bought to offset the sting of higher commodity prices and weaker currency. Gold is also seen as a "safe-haven" investment. As demand for gold escalates during turbulent economic times, so does the price.

What is the current outlook for gold? How are the world's gold extraction rates faring?

Medium to long term, the expectation is for continued strong growth, with demand up and a declining supply. We are at the start of a "bull period" for commodities, especially metals, and these can run for up to 25 years.

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The cost of petroleum products is increasing, so therefore the costs involved in mining metals and exporting them are also on the up. Last year, the amount of gold mined in South Africa, the world's largest producer, was 6 per cent less than 2006 extraction levels. Longer term, we'll see decreasing supply affect the price.

How does gold act as a hedge against inflation?

Many investment companies, governments, banks and individual investors use gold to "store" value at times of high inflation. Historically, the price of gold has risen as inflation has taken hold.

As a currency weakens, the value of gold in that currency tends to increase. In addition, commodity demands increase during inflationary periods - as does the cost to mine, refine and ship precious metals - resulting in an increase in the price of finished bullion products.

What percentage of a portfolio should investors place in gold? Why is it a "safe-haven" investment?

In a well-diversified portfolio, generally a 5 to 15 per cent stake in gold is recommended. The US and many Western European countries have a more developed investor senfgoldtiment for gold than New Zealand. In those countries we see higher percentages of people's portfolios are invested in gold.

Since it was first dug out of the ground, gold has held value. Now it is best viewed as an insurance policy for your portfolio. It protects against inflation and a weaker currency (currency hedging), and it is a liquid, globally accepted physical asset. Investors move to precious metals during times of uncertainty - be it geo-political, war or recession. It tends to give more protection than holding cash.