Gold's sharp gain of 60% in the seven months starting August 07 till Mar 08 began with the Fed's first interest rate change in 18 months. The real cost of borrowing Dollars – (rather, the real returns paid to anyone saving money today) clearly impacts the demand for Gold; lets see how:- compare the changing value of real interest rates with the price of gold, and notice that when the real returns paid to cash sink below zero, investors tend to demand Gold more (as atleast gold beats inflation) . That's what happened in the 1970s.
Why choose gold when real interest rates sink? People will seek out reliable stores of value instead, led by hard assets. Unlike real estate, gold remains a highly liquid, easily priced asset that can store huge quantities of wealth in a very small space.
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