By the end of December, the London PM fix's gold price had reached US$1087.50/oz for the ninth year in a row (Chart 1).
Numerous factors contributed to Gold's strong performance over the past year, including first, an ongoing flow of capital as a result of the economic crisis; second, investors' worries about inflation in the future and their negative outlook for the dollar; thirdly, a shift in central bank reserve management as developing nations increased their gold reserves while western central banks slowed gold sales, causing a structural shift in the supply/demand dynamic. On the London PM fix, in particular, the yellow metal reached a record high of US$1212.50/oz in the second half of 2009. In the midst of the worst financial crisis since the Great Depression, gold's price also rose in 2008 (Chart 2), fulfilling its protective role against unforeseen events and financial distress.

The benchmark S&P 500 and Dow Jones Industrial Average equity indices fell by more than 30% that same year, and the US economy experienced its first annual GDP contraction since 1982. The declines in diversified commodity baskets and other commonly traded commodities ranged from 6 percent to 63%; Incorrectly equated with an investment in gold, the price of oil fell by more than 50% in 2008.
During the financial crisis, gold's price performance placed it squarely in the spotlight.

The yellow metal's high price was solely attributable to inflows into safe havens, according to many investors and commentators who had never dealt with it before.
Between H2 2007 and H1 2009, safe haven inflows played a significant role, but the price increase during that time reflected the continuation of an established trend rather than the emergence of a new one.

Six years prior to the beginning of the financial crisis, the rise in the price of gold began. The gold bull run began in April 2001, when the price slowly rose from its previous low of US$255.95 per ounce, just above the 20-year low of US$252.85 per ounce, which was set on August 25, 1999. Gold's performance in the first nine months of 2001 was extremely modest, rising from only US$20.55/oz to US$276.50/oz, a level it had previously reached and frequently retreated from over the course of the previous few years.

But this time, the rise was going to be a sign of a strong and long-lasting rally. The price of gold increased from US$276.50/oz at the end of 2001 to US$1087.50/oz in 2009, representing a cumulative increase of 293% and an average compounded annual return of 18.7%. Gains of 20% or more were recorded in five of those eight years. The price of gold is determined by the combination of demand and supply, just as it is for any good or service that can be traded freely. The demand and supply chapters go into greater detail about the many factors that contributed to the rise in the gold price during this time period. On the supply side, mine production began to decline in 2001 as a result of deferred mine expansion plans, declining ore grades, and production interruptions. Even though 2009 saw an increase in mine supply, production levels are still lower than they were a few years ago because of widespread producer de-hedging. At the same time, rising costs associated with mining have raised the floor beneath the gold price. According to Metals Economic Group's estimates, the total cost of finding and mining new gold as well as replacing reserves rose to US$655 per ounce in 2008 from US$281 per ounce in 2001 and continues to rise. In addition, the period was marked by a significant change in the behavior of central banks, which switched from being significant market suppliers of gold in 2001 to net purchasers in the second quarter of 2009.

On the demand side, however, a higher floor was being placed beneath the gold price as a result of robust GDP growth and a growing middle class in important jewelry-buying markets like India and China.Gold exchange-traded funds (ETFs), which were pioneered by the World Gold Council (WGC) in 2003 and 2004, allowed investors to buy gold for the first time on stock exchanges while new ways to access the gold market were releasing unused investment demand. As evidenced by the concurrent rise in sales of gold coins and gold bars, the growth of the ETFs was mirrored by a growing interest in gold ownership as a whole.
Gold's advantages as a diversifier started to gain more and more recognition among investors. Investors bought gold as a store of value in H2 2008 and 2009, encouraged by its long history as an inflation and dollar hedge and growing concerns about future inflation and dollar weakness.