According to one school, demand from China and India is pushing the price higher, but another school insists gold is up because Western investors are convinced inflation is much higher than their governments admit.
Gold has always been the investment of choice for bomb-shelter-building doom-and-gloomers, those accumulators of canned goods whom everyone avoids at family gatherings. As an asset, gold usually behaves according to its own set of rules. Gold rises with oil prices, falls when the dollar rises and increases when inflation fears intensify.
It's considered a "safe haven investment" — should your currency become worthless, your gold will retain value.
"For many years, financial advisers would tell individuals to put a certain percentage of their portfolio in precious metals," said John H. Hill, Citigroup's metals and mining analyst. "It's portfolio insurance. If you own gold, physical gold, it's just a hedge on everything else.
"If it goes sideways to nowhere, be happy," he said. "It means the rest of your portfolio is intact, you have a job, your community is OK and the world hasn't descended into chaos."
Gold prices have retreated after hitting a 17-year high of $476.30 an ounce in trading on the New York Mercantile Exchange earlier this month. That milestone means some investors who normally ignore gold are paying more attention to it, with wildly diverging opinions on what gold prices are saying.
On Tuesday, before Federal Reserve policy makers met, Chip Hanlon, president of Delta Global Advisors Inc. wrote a note to clients with the subject line, "Gold makes today's Fed meeting an easy call."
Hanlon said that if Federal Reserve Chairman Alan Greenspan watches gold closely, as many believe, "how can the chairman be anything but horrified by this metal's recent technical breakout to its highest level since the earliest days of his tenure?"
He wrote, "Gold is soaring despite the market's expectation of a 25 basis (0.25 percentage point) hike, more aggressive action is necessary to clamp down on surging inflationary pressures."
Inflation is one reason Hill expects gold to hit $500 an ounce in coming months.
"We regard gold as an essential barometer in the grand battle between hard and financial assets," he said.
"The point is not that the dollar is going to go up or down against the yen or the euro or the yuan, the point is that all currencies are going down relative to other standards of value, whether it be a barrel of oil, a bushel of wheat or an acre of real estate," he said. "Hard assets have obviously been winning, worldwide, for a number of years. That's what gold is telling us."
While jewelry accounts for 82 percent of the gold market, "the catalyst of the day is obviously inflation jitters," he said.
Worldwide demand has increased. Demand in India set a record last year and demand in China jumped as well. In fact, demand was so strong, gold prices held steady in the first half of the year as central banks internationally sold off record levels of their gold supplies, Hill said.
While gold prices usually fall when the dollar rises, that equation hasn't held recently.
"Mounting inflationary concerns, driven largely by higher energy prices, have pushed gold higher despite a stronger dollar," a Sept. 19 Goldman Sachs commodities report said. "For example, the price of gold rose despite a strengthening in the dollar against the euro in June, as the rejection of the European constitution by voters increased the risks associated (with) the long-term stability of the euro."
Goldman estimated a "fair value" for gold at $463 an ounce over the next 12 months, but added that "the recent runup in inflationary expectations suggests the potential for a $15 to $20 move higher.
Gold can sometimes trade off short-term interest rates minus the rate of inflation, said Richard B. Hoey, chief economist and chief investment strategist, The Dreyfus Corp. and chief economist of Mellon Financial Corp.
"Short-term inflation is rising now faster than interest rates are rising," he said.
Still, he doesn't see the recent price increase as indicative of an inflationary surge. "It's still down about 45 percent from its peak 25 years ago," he said. "If you look at a good long-term chart, yes, it is in fact up some. But it's up after a long, dull period."
Just as Hoey doesn't see the recent highs as significant when compared with historical numbers, not all gold watchers are convinced the metal will continue its upward climb.
In a note to investors, Morgan Stanley's Rick Bensignor said, "For my nickel, I suspect there is a trade to be made on the long side, but not necessarily an investment, meaning that I can't tell you with high confidence that gold will be higher than the current level in three to six months."