Nyden, nice work on your early gold buy. Here's my take on gold.
Currency investors prefer currencies with higher real interest rates (yields), and the expected future direction of yields directs the carry trade, which directs the exchange rates of the currencies..
Current yields on some major global currencies:
__short term interest rate___consumer price inflation rate___
yield
Renminbi______4.14%_____________6.9%______________
-2.76%
US dollar______2.3%______________7.5%______________
-5.2%
Gold__________ 0%________________-__________________
0%
Yen__________0.5%______________0.8%_______________
-0.3%
The price of gold has been going up in recent years because its exchange rates against other currencies are benefiting from the carry trade. You often hear journalists saying 'gold pays no interest'.. what they don't seem to realise is that at 0% interest, right now gold is about the highest yielding currency around! That's the fundamental reason why the gold price is going up at the moment.. as they say in fixed income investing, yield is king.
Because the markets are forward looking, today's changes in currency exchange rates reflect expectations of future changes in their relative yields. Some questions affecting the future yields of the fiat currencies:
Are the major central banks coming under pressure to raise or lower interest rates (considering the ongoing credit crisis)?
Is consumer price inflation in the major economies increasing or decreasing?
Is the combination of these likely to drive the yields of the fiat currencies up or down?
The way I see it, massive pressure on central banks to reduce interest rates, combined with structural deficits in all the main commodities stoking inflation, will combine to drive the yields on fiat currencies down, increasing gold's yield advantage.
The US-led global credit boom, under-investment in commodity production, peak oil, Asia's industrialisation and competititive currency devaluation are background reasons for why fiat currency yields are low today, with excessive credit creation over the past 35 years being the main culprit. Thanks to that, it now takes $7 of debt to fund every additional dollar of US GDP - so interest rates there have to be kept low to avoid a depression.
So I see the fundamentals as being a bit stronger than the 'safe haven from the credit crisis' media argument. In fact I suspect that argument is just a safe haven for journalists who don't understand currencies and will be some of the last to buy gold.
Re the question you raised about gold price corrections, they do tend to be big and unpredictable, IMO a few good principles for a conservative portfolio are don't buy all at one time.. average in.. buy more in May-August when prices tend to dip.. don't trade in and out.
Chinese inflation: November 2007 figure
Japanese inflation: Dec 07 figure, central bank official interest rate
US dollar: shadowstats inflation.. all others are bogus (government) figures