Why does the world flock to one precious metal in tough times?

Historically, gold wasn't widely viewed as a speculative investment. "It was simply money, cash in its most basic form," writes gold watcher Doug Casey, editor of the International Speculator, a financial newsletter. "People did not accumulate gold because it could make them wealthy, but because it was a convenient liquid way to keep the wealth they had."

It's only since 1971, when the United States abandoned the gold standard to the dismay of gold bugs (people that play in gold stocks) everywhere, that the potential for making-and losing-big money in gold came to light.

And there was definitely money to be made. During what might be called the golden era of gold in the 1970s, prices soared from $35 an ounce to more than $800. Then the commodities market came crashing down, and a 21-year bear market for gold followed. But, lately, particularly as the financial crisis in this country has deepened and spread around the globe, gold has once again become a favored investment, with the price per ounce hitting its lifetime high of $1,030.80 in March as investors snapped up both physical gold and Exchange Traded Funds, like GLD, that invest in gold.

What determines the price of gold? Supply and demand is the simple answer, but there are some important caveats. The supply of gold is theoretically fixed. Like peak-oil advocates, some gold bugs maintain that gold production has reached a peak and will decline going forward, sending the price to ever-greater highs.

There are some problems with the peak-gold theory. For one thing, the supply of gold above ground, estimated at 158,000 tons, isn't going anywhere. Unlike oil, it will never be used up. One renewable source of gold is "scrap metal"-the pieces that people sell when they need to raise fast cash-that are then melted down and resold.

"In the first quarter of this year, the supply of scrap was up 30 percent up on the first quarter last year, due to selling back in response to price changes," says Graydon of the World Gold Council.