Goldfinger would be impressed. (iStock)Many people can still recall the long lineups at bullion dealers and coin sellers in late 1979 and early 1980 as hopeful speculators jumped on the gold bandwagon. Gold reached a record $850 US an ounce back then as interest rates and inflation headed well into double-digit territory.

But the excitement didn't take long to fade, and bullion began a long slide to just $255 an ounce by early 2001. (All prices in U.S. dollars.) Gold's next major ride up began in 2005, when it broke above the $500 level for the first time since the early 1980s. From there, it was a steady climb higher.

Gold futures hit $600 an ounce in April 2006, $700 in May 2006 and $800 in October 2007. In January 2008, gold finally traded above the record $850 level of 28 years earlier. By March 2008, it reached and surpassed $1,000 an ounce before retreating back below $800 later in the year.

Gold prices: 1999 to 2009 (Source: Kitco.com)

But the financial crisis and the slumping U.S. dollar soon had bullion re-testing those record highs. By October 2009, gold was trading at $1,075 an ounce.

Of course, that's still a long way from a real record high, once inflation is taken into account (gold would need to trade at $2,300 an ounce to match the buying power of $850 of 1980). But a quadrupling of gold prices in eight years and a doubling in four has certainly opened a lot of eyes.

A brief history of gold

Gold has been a desirable and valued commodity since before recorded history. Archaeologists have discovered stashes of gold jewelry dating back to 3000 B.C. in what is now southern Iraq. Ancient Egyptians buried their rulers with elaborate gold adornments, such as the gold mask, sarcophagus and amulets that were fashioned for Egypt's boy ruler, King Tut, in the 14th century B.C.

Alchemy was a popular preoccupation for many centuries, as the most learned members of European, Chinese and Arab societies searched for a way of turning base metals into gold. They didn't succeed, of course. But alchemists did discover many new elements in the process and laid the foundations of modern chemistry.

Gold wafers are available in a variety of sizes. (CBC)

The search for gold launched European explorers on some of the most ambitious and ruthless overseas expeditions. Spanish Conquistadors plundered and ravaged the Incan and Aztec societies of the New World under orders from King Ferdinand to "get gold."

Gold has been used as money for at least 3,500 years. The shekel began circulating in the Middle East in 1500 BC. The Chinese and the Romans followed with gold coins of their own. The ducat appeared in Venice in the latter part of the 13th century and soon became the most popular gold coin in the world. Britain had its gold florins.

So powerful was gold's lure that it often figured in myth. In ancient Greek legend, Jason had to collect the wool of a golden ram – the Golden Fleece — before he could claim his inheritance. Then there was King Midas, who was granted his wish that everything he touched would turn to gold — the Midas Touch.

In the 19th century, gold rushes opened up various parts of the world to sudden development — including Alaska, the Yukon, Nevada, California, South Africa and Australia.

In the 1840s, British gold sovereigns and $10 gold eagle U.S. coins were both considered legal tender in Canada. The first Canadian bank notes were partly backed by gold.

From 1854 until the outbreak of the First World War, Canadian currency was on the gold standard, meaning that the value of the Canadian dollar was fixed in terms of gold. It was a standard that Canada and much of the industrialized world used for a good part of the 20th century — finally abandoning it altogether by 1971.

Gold, which had been pegged at $35 and later $42.22 an ounce, began to soar once ownership restrictions and other controls were removed.

Currently, most of the 2,500 tonnes of gold produced each year is used for jewelry. But as much as 20 per cent finds its way into such industrial applications as telecommunications and computers, where the metal's high electrical conductivity is prized.

Why are gold prices so volatile?

There are a million golden theories to address the rise and fall in the market price of the precious metal. Most relate to supply and demand. When prices rise, some analysts point to heavy buying from central banks or hedge fund managers or investors wanting to diversify their investments away from perceived weak currencies.

The growing middle classes in India and China have been mentioned as one reason why demand for gold has been growing; jewelry is, after all, the biggest use for gold.

Traditionally, weakness in the exchange value of the U.S. dollar has also been bullish for gold prices, and the greenback weakened dramatically against a wide basket of currencies from 2007 through 2009. It reached an all-time low against the euro and a 31-year low against the loonie.

When prices fall dramatically, analysts look for signs that central banks are selling off their gold reserves. Many countries have been doing that. The Bank of Canada, for example, has sold most of its gold reserves and held just $114 million worth as of October 2009. But recently, the wider demand for gold has offset central bank selling as the weak U.S. currency had investors rushing into gold.

Gold has long been a traditional hedge against inflation, and demand for gold tends to pick up when inflation does.

Coins like this 2008 Canadian issue are popular ways to buy gold. (Royal Canadian Mint)

And some price movements may simply be on account of speculation from short-term momentum traders who notice big price swings in either direction and want to join what they see as a bandwagon.

Investors are left wondering whether the next climb or plunge is just around the corner, followed by years of stagnant returns.

Should I buy gold, and if so, how can I get some?

Financial planners generally advise their clients who want a stake in gold to keep their precious-metal holdings to a small part of their overall portfolio – at most five or 10 per cent.

There are many ways to acquire gold. You can buy gold coins, gold wafers or bars, or gold certificates.

• Gold coins: A number of countries mint gold coins. Britain has been producing sovereigns for centuries. Austria, China, the U.S. and Mexico also produce gold coins. South Africa has produced its Krugerrand coins since 1967. Canada joined the gold rush in 1979 with its Maple Leaf gold coin. At 99.99 per cent gold composition, it's the purest gold coin in the world. It's available in six denominations from 1/20th of an ounce up to one ounce. There is a small premium charged on the gold value of the coins. Maple Leaf coins are available from the Royal Canadian Mint, some coin dealers and some banks. Be aware that some Canadian gold coins are aimed at collectors and sell for considerably more than their gold value. So, if you just want a coin for the gold content alone, buy Gold Maple Leaf coins. No GST is charged on gold coins if they are refined to a purity of at least 99.50 per cent. But some provinces charge sales tax on gold coin sales.
• Gold wafers and bars: There's nothing quite like the sensation of tossing around a 400-ounce gold bar, much as James Bond did to lure Goldfinger into his trap in the 1964 movie. Now, you can buy a gold bar, too. ScotiaMocatta, the precious metals division of the Bank of Nova Scotia, has big vaults loaded with gold bars. It can sell you bars and wafers ranging from one ounce to 400 ounces for a small premium over the spot gold price. Most financial institutions will also rent safety deposit boxes to store your gold haul.
• Gold certificates: You can also own gold in certificate form. Any Canadian branch of Scotiabank can issue paper certificates that are backed by the bank's assets. There are no fabrication, shipping or insurance costs and no sales tax to pay. They can be sold easily or exchanged for physical bullion. They are made out of paper, however. Goldfinger would not be impressed.

You can also invest in companies that mine gold. There are dozens of gold companies listed on the Toronto Stock Exchange. Some of the biggest Canadian companies are Barrick Gold, Kinross and Goldcorp. International gold mining giants include Newmont Mining, AngloGold Ashanti and Gold Fields Ltd.

Investing in gold miners can provide more leverage than simply investing in the precious metal itself. What does that mean? Let's assume that it costs a gold producer $500 to produce an ounce of gold, and gold is priced at $1,000 an ounce. If bullion prices rise by $100 an ounce, that represents a 10 per cent price increase. But for a gold miner, that same $100-an-ounce increase translates into a 20 per cent profit increase as the profit per ounce jumps from $500 to $600.

In Canada, dozens of precious metal mutual funds can give investors a stake in a variety of companies that mine gold and other precious metals.

There are also several exchange-traded funds (ETFs) that track either gold mining stocks or the actual price of bullion. The iShares CDN Gold Sector Index Fund (TSX symbol: XGD) invests in 28 Canadian and foreign gold companies. It trades like a stock on the TSX and has a low annual management expense fee (0.55 per cent), making it an attractive alternative to mutual funds.

Two other ETFs track the price of gold directly. Units of the iShares COMEX Gold Trust (TSX symbol: IGT, AMEX symbol: IAU) and SPDR Gold Shares (NYSE symbol: GLD) track the price of gold directly. Each unit's price represents the cost of 1/10th of an ounce of gold.