The Return of The Gold Bugs

The price of gold passed $500 an ounce last week, its highest level since the late 1980s. This is either an ominous development--or it isn't. You can make the case that higher gold prices (up 23 percent from 2004's average) warn of worsening inflation. Gold has long served as an inflation hedge, and when U.S. inflation reached double-digit levels in the late 1970s, gold hit a record high of about $850 in early 1980. But you can also argue that the present run-up has little to do with inflation and mostly reflects that old economic standby: the law of supply and demand.

It's precisely because gold has so much history that we still watch its price. In his illuminating book "The Power of Gold," Peter Bernstein notes that "Egyptians were casting gold bars as money as early as 4000 B.C." Later in Europe, gold enabled kings to pay armies and bribe rivals. In 1511, Spain's King Ferdinand exhorted his conquistadors: "Get gold, humanely if possible, but at all hazards, get gold."

If you'd lived a century ago, gold would have been the basis of your money. Great Britain dominated the global gold standard; ... // 77% Remaining