Since the beginning of time, gold has had a special place in history. It has been used to build religious idols, settle political differences, honor monarchs, demonstrate affection, serve as currency and, more recently, has been used for commercial processes. Until 1971, gold backed the U.S. dollar and is still held by central banks around the world for use in times of emergency. It also holds promise for traders - if they can find the trend in this often volatile commodity. (For more on gold, see The Gold Standard Revisited and What Is Wrong With Gold?)

Background
From the Roosevelt administration during the Great Depression in the 1930s until President Nixon took the country off the gold standard in 1971, the price of an ounce of gold had been fixed at $35/ounce.

Following the removal of the gold standard for currencies, gold prices skyrocketed 2,200% in U.S. dollar terms over the next nine years, peaking briefly above $800 in 1980. It then spent the next 19 years in a bear market, dropping as low as $260 in 1999 before starting its next long-term rally. But thanks to an easing of currency restrictions following the last recession, the Fed is facing increasing challenges. The effective Fed funds rate was above 6% in early January 2001 but by early 2004, the rate had fallen more than 80% to 1% and the Fed did not start increasing the rate again until June 2004, more than a year after the rally had begun. The Fed has taken a much more accommodative stance on rates, which continued through 2007, and a weak dollar and rocketing commodity prices during this year are the evidence of this: Gold again surpassed $800 in 2007. Although we'll never know how high a new peak will be until it's behind us, increasing volatility appears to be the modern gold reality.