By Kishori Krishnan Exclusive to Gold Investing News

Oil has reached its nadir. Even as investors remained timid after a U.S. Commerce Department report which showed the economy shrank at a annualized pace of 5.4 per cent in the October-December period - much faster than the 0.5 per cent decline logged in the prior quarter, oil prices hovered near their previous close below $42 a barrel. Caught between dismal U.S. economic numbers and news of possible further OPEC cuts, investors are eagerly turning to gold, which is turning out to be a good investment in times of uncertainty, given that this precious metal’s value is well insulated from economic fears.

Worldwide, gold has made an outstanding 250 per cent jump in the last two years. Starting in 2006 with a low of $400 per ounce, gold jumped dramatically to $1,000 per ounce in 2008. On Friday, gold price jumped over $15 to reach above $920 an ounce in early London trade, dipping at the New York Open before hitting a new 3-month high of $929.40 in afternoon trade. Gold bullion ended the day near that high with an impressive gain of 2.4 per cent, up almost 3.5 per cent for the week.

Silver followed a similar pattern and ended near its high of $12.66 with a gain of 3.66 per cent. Oil rose after US economic data - showing a 3.8 per cent contraction on an annualized basis at the close of 2008 - was not as bad as expected. The Gold price in Euros too rose to a new record high of €722, platinum gained $17.50 to $983, and copper added a penny to about $1.46.

Analysts aver that the world economic downturn does not match the steep drop in the price of oil. It is simply way out of proportion. But until alternative sources of energy become commonplace and inexpensive, consumers will continue to heat their houses with oil and automobile owners will pump their gas tanks full of crude. With OPEC’s cut in oil production in December 2008, supply and demand is soon expected to become in sync with each other, with the subsequent effect of raising oil’s price in the marketplace. Peaking with a price close to an all-time high of $150 a barrel in mid 2008, the price of the black gold has dropped sharply to a low of nearly $30 dollars a barrel by the end of 2008.

As for the yellow metal, a major Swiss bank has confirmed that it has upped its gold price predictions for the medium term. Reuters reports that UBS has announced that it now predicts that gold will be over $900 per ounce in a month’s time, while its three-month projection has been increased to $850 per ounce - both up from original calls of $800.

Strategist John Reade explained in a note that the move has been motivated by a concerted surge in the volume of gold investment in the current uncertain financial climate. “Our client flows suggest that the developments in the banking sector have truly spooked investors again, with strong demand for coins and small investment bars,” he said.

While gold is traded in dollars, the price in Euros is up 15 per cent this month and 5.9 per cent in U.K. pounds.

Reade’s view was supported by William O’Neill, a partner at Logic Advisors, who said, “The economic climate remains highly constructive for gold.” Adds Matt Zeman, head trader at the Chicago-based firm, “as other commodities are increasingly suffering in the current climate, gold will remain on an upward curve”. He told Reuters: “You see these steep sell-offs in equities and we see a lot of that money coming back into gold. The biggest beneficiary right now of the flight-to-safety bid is gold. I think it looks poised to continue to move higher.”

Interesting Week

It has been an interesting week with the market now drawing the conclusion that the financial crisis is far from over, and the governments of the world are likely to throw a whole bunch more money at the problem. In the US, the CBO has suggested that banks may still require ‘hundreds of billions’ in additional bailout moneys before all is said and done.

Bank stocks continue to plunge on fears that some of the most troubled, such as Citigroup or Bank of America, might have to be nationalised. IT giant Microsoft announced its first layoffs in its history. And GE reported a 44 per cent drop in fourth-quarter net income.

Simply put, gold does well when investors think the world is coming to an end. It’s a hard asset, which makes it a more stable bet than stocks, corporate bonds and currencies. “Where do you hide if you want to be defensive? There are fewer and fewer places,” said Axel Merk, president of Merk Mutual Funds a Palo Alto, California-based money manager specialising in currency investments.

Analysts insist that gold will comfortably hold above the $900 level as the unusual decoupling with the Euro (and unusual coupling with USD) continues due to the metals improved luster resulting from widespread global economic gloom and ultra low global interest rates. As the price of money (interest rates) is held down by central banks, the price of its competitor (gold) pushes higher on the lack of yield reward in monetary alternatives.

Gold gained $22 as Wall Street closed the worst January on record. Gold futures rose Friday, ending the week at their highest level in six months as investors sought the safety of the metal following government data that showed the U.S. economy contracted the most in 27 years during the fourth quarter.

“Demand remains very high internationally for ETFs, gold certificates and bullion coins and bars,” said Mark O’Byrne, executive director at Gold and Silver Investments. We’ve seen ‘continuing safe haven demand for gold’ due to ’sharp deterioration in the global economy.’ Gold for February delivery closed up $22.20, or 2.4 per cent, at $927.30 an ounce on the Comex division of the New York Mercantile Exchange, the loftiest closing level for a front-month contract since July. The benchmark contract has risen 3.5 per cent last this week and 4.9 per cent in January.

“People don’t have faith in currencies at the moment. There is still an underlying faith that gold will go higher. Gold will rise in the longer term, based on a growing distrust of all paper currencies,” said Adrian Day, president of Adrian Day Asset Management. “People are turning to the one true money, which can’t be created by governments and holds its value.”

Isn’t that where you, dear investor, should be parking your money?