Two years into our “Great Recession” (or “Greater Depression,” depending on who you talk to) gold is selling for $944 an ounce. But back in 1980 – against the backdrop of double-digit inflation in America and a prolonged economic stagnation – gold reached a peak of $850. That’s the equivalent to about $1,900 in today’s money.

Of course, the world was a very different place in 1980. Deflation is now the bogeyman stalking the global economy (although here at Notes we believe a surging asset-price inflation is not far off). And back then, there were persistent rumors that Ronald Reagan was going to bring back the gold standard and send gold, in 1980 money, to $1,000 an ounce.

But as John Katz and Frank Holmes point out in their excellent book on the subject, The Goldwatcher (2008), the supply and demand picture is a lot more favorable towards higher gold prices now than it was at the beginning of the 1980s.

Another factor in favor of gold now is that in 1980 sentiment was negative to South Africa and Russia, the world’s two main suppliers of gold at the time. South Africa because of Apartheid and Russia because of the Cold War and the rise in the gold price would have benefited both countries as the main suppliers at the time of the world’s gold. There is no longer antipathy to either country and there are now also many other supplying countries.

But surely the two most pent demand drivers now are Exchange Traded Funds and surging economic growth in China, India, other developing economies and the gushing wealth in the Middle East and other oil exporting countries.

Gold prices are a complex puzzle made up of many moving parts, as the above extract shows. But that’s why we love the world of investing: it’s a great intellectual challenge. We wouldn’t have it any other way…

So, where are gold prices going? Well, it’s no secret that here at Notes we’re long-term bullish on gold. In our view, since the gold standard was abandoned in 1971, the price level of gold really only has one direction – up.

This is also the view of Morgan Stanley’s chief economist Stephen Jen. See, although the Fed and other central banks around the world are fretting over deflation right now, a persistent deflationary cycle is virtually ruled out by our fiat currency system.

Think about it. There are literally no limits on the amount of money central banks in fiat money-based economies can print. And because central bankers now believe the biggest threat to the global economy is deflation, they’re far more likely to overshoot to the inflation side than undershoot and allow deflation to take root.

But don’t just take our word for it. Jen has drawn two major conclusions about the future price of gold following a study of almost two centuries of consumer price data for the US, Britain and Germany:

1. Low inflation usually doesn’t last. Since 1820, periods of exceptionally low inflation have usually been followed by periods of high inflation. Episodes of high inflation occur typically, but not exclusively, around military conflicts.

2. Inflation has gone global. It has become more synchronised across countries over time, probably reflecting increasing globalization.

We don’t advocate, like some gold bugs, “betting the ranch” on gold. Remember, the most important weapons in an investor’s arsenal are asset allocation and risk management. If you haven’t fully mastered these, you shouldn’t a dime invested in the market… period. (Make sure you’ve read Dr Van K Tharp’s book on the subject, Trade Your Way to Financial Freedom. )

We recommend holding roughly 10% of your portfolio in gold. The question then is: what kind of gold? We personally favour owning physical gold – particularly British gold sovereigns, Krugerrands and gold bars.

This can be clumsy. But all you really need is a safe deposit box at a bank you trust – preferably outside of the US. (Underground investor and resource expert Rick Rule holds his physical gold in a bank safe deposit box located at his half-year residence of Canada in the bank of Nova Scotia.)

If you decide to buy physical gold, keep in mind these two rules from veteran coin dealer Lawrence Chard, managing director of Tax Free Gold:

1. Don’t follow the herd and buy only when the underlying gold price is rising.  Instead, buy on the dips and the downtrends. If you believe in the long-term future of gold, you shouldn’t be worried about temporary dips in price. If you don’t believe in the long-term future of gold, you shouldn’t buy in the first place!

2. Buy at the lowest premium (over the spot gold price) as possible. This often means buying in bulk. This is especially true of British gold sovereigns. According to Chard, you should buy these “only if you are buying say 50 or 100 coins at a time, when the premium is only slightly higher than Krugerrands. If you buy small quantities, you may be paying a ‘collectable’ or ‘retail’ premium.”

There are plenty of other ways to stock up on gold. Many of which may be less hassle then owning physical gold. This from our friends at Investment U:

1. Paper Gold: The SPDR Gold Trust ETF (NYSE: GLD) is a good option for investors who need liquidity with their gold assets. You can buy and sell this ETF like any stock on the market. Which also means you can sell it short, if you believe it will fall.

2. Gold Futures: Gold futures may be an excellent option for some. However, he stays out of gold futures because he believes it’s too volatile. Rick believes silver futures are even worse, like gold futures on steroids.

3. Gold Stocks: Gold producers trade between 1.7 and 2 times the net present value of their cash flows they could generate. It’s called the warrant on the gold price. Basically the market has assigned a large “growth” premium to a mining business – where the business gets smaller every day. There’s less and less gold to mine.

Silver might also be a good bet if your portfolio is already flush with gold.   Particularly because of the disparity between the price of silver and gold in today’s market.

Underground investor Addison Wiggin reckons silver will give you at least a 3 to 1 gain over the next 12 to 24 months. But you need to pick the right form of silver to invest in. He outlines how to make a 303% return here