As stated earlier, gold is not a very traditional investment and it might be hard to grasp what’s behind the price of gold. People have very different reasons for valuing gold.

A lot of the people rooting for gold have strong political agendas. They might see the current credit system as unfair and temporary and hold gold as something sacred. You see gold bugs arguing that dollar and other fiat currencies will eventually become worthless while while we go back to a gold based economy. The transition back to a gold standard seems very unrealistic and the implications would be devastating. You can read more about this at Gold Isn’t Money, Yet by Gary North.

The same article points out that the number of economists supporting the return to a gold standard is marginal at best. So these people you hear talking about the gold standard don’t have too much support from the academic community. Anyhow it’s not just nut jobs (or visionaries) that invest in gold. It’s become a legitimate and quite a popular investment, which is good considering the liquidity. In some countries the taxation has been fixed to make purchasing physical gold easier.

The most common use for gold is as a hedge. Stocks down, gold up and so on. All kinds of political instability, crises, two towers exploding in manhattan, volcanoes erupting, aliens invading –> gold shoots up. Even something as mundane as inflation drives the price of gold up. About the relation between oil prices and inflation I could write more later. For now I’ll leave the subject with a quote that’s not even too pessimistic (for example, Stephen & Donna Leeb predict double digit inflation in The Oil Factor.):
“Our analysis indicates that a crude price increase to $100 would boost U.S. inflation rates above 6 percent.”