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Over the last five years gold has given sterling investors 20% + annualized returns, reaching a high of US$1217 in December. The current price has slipped a bit to US$1079. The gold bulls, including many fund managers, are tipping new highs of $1500 in 2010. What are the arguments for and against?

Against

The case for gold is put by those who predict inflation and deflation, a worrying thought for some contrarians!
Gold is traditionally used as a hedge against inflation and there is no doubt most people are expecting inflation to pick up (higher fuel costs, VAT increases (UK). Gold could be attractive as the new Global reserve currency of the future. The deflationist’s argument is that the dollar may drift into negative growth and set off more quantitative easing by the Fed. There has been more or less perfect negative correlation between gold and the US dollar for the past couple of years.
So, the fundamentalists are taking the current weakness as a buying opportunity. The contrarians however argue that the price has risen far enough and that when the hot money finds a new opportunity the gold price will, inevitably, fall.

For

Gold tends to correlate inversely with the stock market’s confidence. Market participants are trying to forecast scenarios from deflation to hyper-inflation and from prolonged recession to imminent and sustained recovery.
Despite having a zero yield and the stock market enjoying a fairly broad-based rally, gold is still in demand from Central banks, institutions and retail investors as a safe haven and as a hedge against inflation.
India has been buying (recently bought 200 tonnes from the IMF) as have Sri Lanka, Mauritius and also, it is believed, the Chinese. Large gold miners have been closing their hedge books and we know the physical gold market suffers from supply-side pressure. Production is falling year on year, there has been a lack of new major discoveries and the average grades are falling. The major miners are looking to acquire smaller mining companies for their gold assets in new geographical areas to compensate.
Further bullish points are the possibility of a ‘super sovereign’ international reserve currency, which would include gold, and the reintroduction of the gold standard in the US (probably not expected as this would require a gold price of at least $6500/oz). To sum up, there seems to be as good a case for the bulls as for the bears but volatility in market sentiment could see volatility in the gold price between $950 and $1350. There would seem to be a place for some sort of gold investment in any diversified portfolio.