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By Naomi Caine

Will the price of gold ever stop rising? And if not, how do you invest in the precious metal?

The price of gold has been on the up for the past few years. It has climbed from a low point in 1999 of an ounce to break through an ounce and hit 25-year highs. It is still some way off it all-time high of an ounce in 1980, but many experts predict it will reach similar levels over the next year or so. GFMS, a metals consultancy, thinks the price could hit either later this year or early next. It could go higher if there is military action in Iran . Some commentators are even more bullish, with forecasts of a gold price of ,000.

So why the sudden interest in the precious metal? Gold is traditionally seen as a safe investment in times of economic uncertainty. It is perhaps no coincidence that the last gold rush happened when there was tension in the middle east.

The price of gold has kept pace with inflation for at least 200 years, according to The World Gold Council. And if the economy is wobbly, it's always comforting to have an investment that retains its value.

Gold is also used as a hedge against an ailing US dollar. If you look at a chart of the gold price, it typically moves in the opposite direction to the American currency. The gold price hit an ounce - a 16-year high - at the end of 2004 as investors tried to cushion themselves from the falling dollar.

The dollar has since picked up, but there are worries that the currency is overvalued. If it falls against other currencies, investors could switch out of the dollar and into gold.

There is also little correlation between the performance of gold and the performance of other markets, such as property and shares. So it can be a useful way to balance your portfolio. Peter Hambro of Peter Hambro Mining, a gold mining company, says: "People think nothing of buying insurance when they buy a house and gold provides that for an investment portfolio."

Thousands of investors have been buying up gold over the past six months. Tony Baird of Baird & Co, one of the biggest bullion dealers, says: "Private investors are back in the market. They have been active since the end of last year and we are selling double the amount we normally trade." Are so many investors really so safety conscious, or is there another reason behind the modern gold rush?

Experts cite the booming demand from India and China , where the economies are growing at breakneck speed. As people become richer, they want more stuff – often jewellery and watches. The World Gold Council is predicting that demand will rise threefold from 600 tonnes annually over the coming year, partly driven by expansion in Asia .

Demand is boosted further by the burgeoning market in exchange traded gold securities. The securities track the gold price so they offer investors a cheap and easy alternative to buying gold bullion. They are doing a roaring trade. The number of private investors who have put money into Gold Bullion Securities listed on the London Stock Exchange has gone up by 25% during the first three months of the year compared with the fourth quarter of 2005.

Pension funds are also snapping up the schemes to get exposure to gold. BT and Sainsbury pension funds have both recently invested in gold securities. Graham Birch, who runs the Merrill Lynch Gold & General fund, says: "Demand has been strong but supply is constrained because there's been little investment in new mines."

Fans of the precious metal believe we are only at the start of the great gold rally. Hugh Hendry, the maverick hedge fund manager and founder of Eclectica Asset Management, says: "Bull markets follow bear markets and vice versa. We have had the greatest bear market in gold, which lasted for 25 years until 2000. We have barely scratched the surface."

The gold bulls also point out that gold is way off its peak, if you take into account inflation. It would have to hit about ,000 today to reach the same level in real terms. Others are worried the price is too frothy. They also see speculators piling into the sector on the back of rising prices, not investment sense - so we are in danger of creating a bubble.

The run on Gold Bullion Securities only adds to their concern. If gold becomes just another asset class, then the market will become much more volatile and prices could fluctuate wildly. Nick Goodwin, a mining analyst, says: "Exchange traded gold has totally changed the market. There has been a big marketing drive and there is a lot of hype. Why weren't people buying gold when it was but want to buy it at ? Gold has had a hell of a run and it needs to take a breather."

How to invest in gold

Most advisers recommend that you have some gold in your portfolio, say 5% to 10%. There are various ways to invest in the precious metal. We don't tend to buy gold jewellery as in investment, unlike investors in some other countries. The mark up on the retail price can often be as much as 300%. The other downside of jewellery is the risk of theft.

Coins

C oins or small bars might be better options. They are also exempt from Vat. Krugerrands are one of the most popular bullion coins. They currently cost about £46 for 1/10 of an ounce up to about £368.50 for a full ounce. You can buy a small bar of gold bullion for as little as £40. Merchants make their profits from the margin between the buying and selling price. Investors also have to pay for storage and insurance. Baird & Co, for example, charges about £100 per kilo a year. For a list of coin and bullion dealers visit www.gold.org .

Exchange traded gold

Gold Bullion Securities (GBS) tack the price of gold. Each GBS share represents one tenth of an ounce of gold and is backed by bullion held in the vaults of HSBC. The value of the shares should rise roughly in line with the price of the precious metal, after charges of 0.4% a year and dealing costs. The total costs can be lower than trading in coins and bars, and you don't have to worry about storage.

Shares and funds

If you don't want to buy gold, you could buy shares in a gold mining company such as Newmont Mining or Anglo Gold, or you could invest in a commodities fund. The Merrill Lynch Gold & General fund is dominated by gold-mining stocks, but it can also hold up to 15% of its portfolio in companies that mine other commodities. The fund has enjoyed a spectacular performance over the past five years, posting a return of 395%. JPMF's Natural Resources fund invests in a broader spread of commodities, including base metals and energy stocks. It is up 382% over five years. Investec Asset Management this month launched an onshore version of its Guernsey-based Global Gold Fund.

Spread betting

You can bet on the price of gold with firms such as City Index and Cantor Index. Alternatively, investment banks such as Goldman Sachs offer warrants and certificates on the gold price. They give you the right - but not the obligation - to buy or sell at a specified price on a set date.