Investors poured money into gold ETFs through mid-2009. The gold holdings of the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust (GLD), surged to over 1,125 metric tonnes in June of 2009. Other ETFs around the world are also buying gold. The more ETFs stock up on gold, the higher the price of gold goes. (See Table 4.1.) I'm thinking that the smart money is betting on a big rise in gold.

As the banks melt down, and as other investments turn to dust, investors will likely turn more and more to gold. And the GLD, XAU, and other gold ETFs and funds make buying gold easier than ever.

Table 4.1 Official Gold Holdings by Country Source: World Gold Council, June 2009.

CountryMetric TonnesPercent of Reserves USA 8,133.5 78.3.

Germany 3,412.6 69.5 Italy 2,451.8 66.1 France 2,450.7 73.0 GLD (Gold ETF) 1,125.7 N/A China 1,054.0 1.8 Switzerland 1,040.1 37.1 j.a.pan 765.2 2.1 Netherlands 612.5 61.4 ECB 501.4 18.3.

Russia 536.9 4.0 Indeed, the SPDR Gold Trust, the biggest of the gold ETFs, now holds more gold than many countries.

Is this investment demand sustainable? Well, nothing lasts forever, and we saw ETF gold holdings dip in 2009. At some point, gold ETFs will start selling gold, and that will weigh on the market. But it's impossible to tell when the peak will be. I do think investment demand will get more urgent in 2010.

Meanwhile, silver investment demand lagged gold, but now seems to be playing catch-up. Implied net silver investment more than doubled to 50.2 million ounces in 2008, largely due to record inflows into ETFs and a surge in Indian investment.

Force #3: A Flood of Red Ink from Washington

As I told you in Chapter 3, fundamentally speaking, the U.S. government is issuing far too many dollars, eating away at its value. This has been going on for quite some time, but it accelerated when the government started throwing money at the financial crisis in 2008.

The U.S. fiscal deficit could top $2 trillion in 2009-a whopping 15% of gross domestic product. That would increase by one-third the total stock of federal government debt outstanding. What's more, the deficit will probably be even larger 2010.

A $2 trillion deficit means that, if the economy produces $14 trillion in goods and services in 2009, the government's deficit is more than 14% of the economy.

Supporting all the debt eats away at our nation's productivity. That's just the deficit. That does not count the rollover of the existing federal debt, which is at least another $2.5 trillion in 2009.

So then, where will capital come from to finance the recovery? Answer: It won't.

Instead, we'll keep borrowing. We'll borrow from U.S. citizens and foreign investors. We'll borrow from foreign central banks (h.e.l.lo-o-o-o, China!).

Heck, our government is even buying its own debt. Our government buying its own debt is like a snake eating its own tail! How can Uncle Sam possibly repay these mountains of debt? The only way to do it-that I can see, anyway-is to make those mountains into comparative molehills by devaluing the U.S. dollar lower-perhaps much lower.

Since gold is priced in dollars, as one goes down, the other tends to go up. It's what I call The Seesaw of Pain.

Force #4: Are Central Banks Catching Gold Fever?

Sales of gold by the world's central banks are typically a bearish force for gold prices. In September of 2004, a new five-year agreement limited sales to 500 tons per year.

However, bank sales did not reach their limit in 2008 and some are guessing that banks are no longer eager to sell their gold.

In a recent Gold Demand Trends, the World Gold Council pointed out an interesting fact: Central banks are selling a lot less gold.

"Muted central bank sales contributed just 35 tonnes to total first quarter supply, less than half the level of net sales in Q1 2008, " the WGC wrote.

The WGC also noted that China revealed after the end of the period under review that it had added 454 tonnes, purchased since 2003, to its reserves.

And that brings us to Force #5.

Force #5: China's Gold Reserves Are Probably Going Much Higher

In fact, from 2002 to 2008, China stealthily increased its holding of gold to 1,054 metric tonnes from just 600 tonnes.

That put China's gold holdings at 1.8% of its foreign exchange reserves-much lower than the share of gold in the foreign exchange reserves of the United States, Italy, and Germany. Some would argue that not only is this way too low, but that China is going to correct it, using some of its huge worth of foreign exchange reserves.

The problem is the sheer size of China's foreign reserves-$2 trillion worth. If China decided to hold 5% of its current reserves in gold (the international average is 10%), it would need to buy more than 3,000 tonnes of gold-or about one full year of global production.

What do you think that would do to the gold price? It would send it through the roof!

What would China sell to buy gold? Probably U.S. Treasuries. China is the largest single holder of U.S. Treasuries, with $763.5 billion at the end of April, according to U.S. Treasury data.

Of course, if China sells Treasuries, that would weaken an already troubled U.S. dollar.

This would have a double-barrel effect on the price of gold-pushing gold prices up as China buys gold and pushing the value of the dollar lower, which, in turn, would push gold even higher, because gold is priced in dollars!

Could Gold Prices Go Lower?

Sure, gold prices could go lower. And I think that would be a heck of a buying opportunity. While I expect that deflation will be shortcircuited by the Fed's reflation efforts, these might fail and the country might slide into deflation and depression, and bring the world along with it. And while gold did well during the last Great Depression, that doesn't mean it will do well in the next one.

Also, if the recession continues, it could really dampen worldwide demand for gold jewelry, which is 68% of all demand.

On the other hand, investment demand for gold is growing by leaps and bounds. Also, consumer demand for gold in newly wealthy countries like China and other emerging markets is ramping up; many of these countries have a cultural affi nity for gold.

Add it all up, and while nothing is certain, I think the easy path for gold is much higher over the long term.

These are just five of the forces coming together to drive gold and silver prices higher.

Buying Gold-Let's Get Physical

Now let's talk about ways you might want to buy gold-and ways you might want to avoid.

How do you want to own gold? Some people say that to be really safe, you have to own gold bullion. And I won't argue against it-heck, I own gold bullion. Nonetheless. . . .

Here are some arguments against buying gold bullion. Just remember that:* If you buy gold through a dealer, you'll have to pay his markup.

* If you buy your gold in the form of gold coins, they will usually carry a bigger markup than gold bars.

* Once you own it, you'll have to store it securely, whether it 's paying for a safe deposit box or burying it in the backyard.

* Once you decide to sell it, the dealer will want his cut on the other end, as well. The exception is when demand is high, and a dealer may pay you the spot price.

All these things aside, there are great reasons to buy and own gold bullion.

Gold can't be destroyed by fire, flood, or plague. It can survive the complete collapse of a financial system. I'm not saying that's what's going to happen; I'm saying gold has a well -earned reputation as the ultimate safe harbor. Gold will never go to zero. If you want to play it safe, own gold.

Let's talk about some of the physical ways to buy gold. I talked to some experts about this: One is Patrick A. h.e.l.ler, owner of Liberty Coin Service (http://www.libertycoinservice.com) in Lansing, Michigan. Another is Dan Rosenthal, the founder of the widely respected The Silver and Gold Report, and now a consultant for Natural Resource Hunter. Both of these gentlemen have forgotten more about buying gold bullion than I'll ever know, so I 've included their comments where appropriate.

Bullion Bars and Coins

Both experts favored coins over bars, Rosenthal strongly so. Bullion coins-American Eagles, Buffaloes, Canadian Maple Leafs, and so on-allow you to own investment grade gold (between 0.90 and 0.9999 fineness) in a quant.i.ty that will be recognized at any gold dealer in the Western world.

Most bullion coins are minted in-ounce, -ounce, -ounce and 1-ounce form (some can be larger). However, one -ounce gold bullion coins such as Eagles or Krugerrands are by far the most popular for small investors.

So what's wrong with bars? They're much easier to counterfeit than a coin. "If you go to Asia with a bar of gold, or to another country, they won't know a particular bar from a hole in the wall," Rosenthal said. "Coins have much, much wider recognition."

Not everyone agrees with Rosenthal on this. One dealer told me: "Engelhard gold bars (made by Englehard Australia) are very widely accepted, and they are numbered as well. And I have seen more phony Kruggerands and $20 U.S. pieces than fake ingots."

The point is to be very careful.

Rosenthal especially warned against buying gold bars on eBay, craigslist, or some other online site. "If you do buy a bar, the only place to do it is on a reputable commodity exchange," he added, like the COMEX. "You can take delivery of the bar and leave it in storage on the exchange."

Futures trader Charles Nedoss of Peak Trading Group in Chicago confirms that he has clients who do this from time to time. "You take delivery and hold the receipt. The storage fee is nominal."

"If you take delivery of the bar from the COMEX, it loses all liquidity," Rosenthal says. In other words, it 's much harder to sell. "The person who buys it is going to insist on drilling it if they have any brains," to make sure the bar isn't counterfeit or hollowed out and refilled with some other metal.

Back when he was running his newsletter, Rosenthal saw one of the reputable mutual funds get stuck with 500 counterfeit bars of gold.

"There are lots of ways to counterfeit bars, it's infinitely harder to counterfeit coins," he says. "Tungsten has the same approximate weight as gold down to several decimal places. A counterfeiter can make a tungsten bar, coat it with gold, and stamp it. Then it looks, weighs, and feels real."

Now for the bad news-COMEX gold futures contracts are for 100 troy ounces. That's a lot of gold, especially when the price of gold is going up and down like a yo-yo. Nedoss says his clients usually buy a futures put option to protect themselves against violent price swings.

There are still bargains to be had in coins, and if you work with a reputable dealer, he can steer you to them.

On the other hand, h.e.l.ler recommends avoiding "obscure" gold coins. "Dow Chemical used to give retiring employees a 1-ounce gold medal," he explains. "That is not something I would recommend for people to purchase as a way to own an ounce of gold. That's what we sell to jewelers to melt down."

One fairly common source of silver coins is ordinary U.S. pre- 1965 coins. The amount of silver in pre-1965 coins is commonly 90%.

Here is the silver content of various earlier silver coins:* Silver dollars contain 0.77344 troy oz. silver content.

* Half dollars contain 0.36169 troy oz silver content.

* Quarters contain 0.18084 troy oz silver content.

* Dimes contain 0.0723 troy oz silver content.

Precious metals are usually sold by the troy ounce, which weighs more than the typical ounce we use in everyday life. But just to add further confusion, there are 12 (not 16) troy ounces in a troy pound.

So, if you want to pick up silver on the cheap, you can look for the big bags of pre-1965 coins sold by some dealers and online. However, be aware of a few things.

While many silver bugs and survivalists are stocking up on pre- 1965 coins for their silver content, that may not be a fact that is generally known. Heck, nearly half of the U.S. population doesn't know that it takes Earth a year to orbit the sun!1 And 18% of Americans think the sun revolves around Earth.

What I'm saying is that, after a crash, if silver shoots up in value, you may have some difficulty convincing Bubba at the corner store that your pre-1965 coins contain 90% silver.

Calculating the Premium on Gold Coins or Bars

To calculate the premium you're paying for a gold bar or coin, use this formula:Divide the cost of the coin by its gold content to get your