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Tickers in this Article: IAU, GLD, ABX, NEM, KGC, FCX
After breaching the psychologically important $1000 an ounce barrier last February, only to then get stuck in a meandering trading range, gold prices have once again traded over that mark. Concerns that global economy was on the verge of a major collapse was largely behind that earlier run-up. Now that a major crisis appears to have been averted, is there less of a case now for buying gold than earlier this year?

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Gold's Monetary Value Appeal
While the risk of a global economic meltdown has clearly diminished, lately it has been replaced by a worry that has always prompted increased demand for gold in the past; the concern about the real value of paper currency.

In such times gold shines as a monetary reserve asset. Like any currency, gold is a medium for storing value. And with the U.S. government now massively in debt and monetizing that debt by expanding the money supply at an unsustainable rate, the new fear driving bullion markets is that the U.S. dollar could collapse.

Chinese Diversification Intentions a Major Bullish Factor
Those fears have been recently stoked by carefully placed comments coming from Chinese policy makers. With most of its reserves in U.S. dollar denominated government debt, China has reason to be concerned that its $2 trillion nest egg is at risk of being seriously devalued by Washington's stimulative policies. Offloading some of this exposure is virtually impossible without causing a financial market crisis, so the only choice left for the Chinese is to incrementally diversify away from U.S. dollars.

Apart from yen, euros and pounds, the other obvious item on their buy list has to be gold. With China still managing to generate a trade surplus, it would seem that there's enough buying power there to nudge bullion higher if they continue their campaign to diversify away from the greenback. So far, they've already doubled their gold reserves.

The impact of such monetary reserve buying could have an even greater effect on the bullion price once jewelry demand, which accounts for about three-quarters of gold, begins to rise again. Demand for gold jewelry hit a five-and-a-half year low during the second quarter of 2009, as traditional gold consumers like India saw demand plunge by 31%.

Such a drop in demand is unlikely to last in a traditional society that still regards gold as the principal vehicle for holding wealth. (Demand for gold in countries like India is one of the reasons an investor may want to buy gold, learn more reasons in our article 8 Reasons To Own Gold.)

Plenty of Options Available To U.S. Investors
For U.S. investors looking to profit for any continued rise in gold prices, there are plenty of investment options available. In addition to buying physical gold or gold futures, exchange-traded gold trusts like iShares Comex Gold (NYSE:IAU) and SPDR Gold Trust (NYSE:GLD) offer a way to play bullion prices directly.

Buying shares in gold mining companies such as Barrick Gold (NYSE:ABX), Newmont (NYSE:NEM), Kinross (NYSE:KGC) and Freeport-McMoran (NYSE:FCX) is another way to capture gold's upside potential but generally in a less effective way given the tendency of most major producers to sell forward much of their current and future production, thus fixing their return.

The Bottom Line
Regardless of whether you believe that the collapse of the U.S. dollar is imminent, the fact that gold has outperformed U.S. equities fourfold over the past eight years suggests that a strong enough argument can be made to allocate at least a portion of one's holdings into gold. (For additional reading, check out Does It Still Pay To Invest In Gold?)


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