Gold is rare and cannot (easily) be faked so it retains its value even though banking systems and paper money are crashing. In fact, there's a law in economins known as 'Gresham's Law' which states that when there is legal tender currency (as the case with the Dollar), bad money will drive out good money out of circulation. Look at it another way. Should inflation continue rising then your food, fuel and gas are likely to continue moving up in price. So, if you had to visit your gas station and you had the choice to pay with either pure gold coins or US backed paper dollars...with the dollar giving ground while the price of gold remaining stable what would you spend? [obviously you would want to keep the gold!]
The boom in the gold price is also partly as a result of its desirability by a growing middle class in China and especially India. In fact, China now produces even more gold than South Africa. China is now the planet’s leading gold producer. China’s 2007 estimated output comes in at 276 metric tons of precious gold (about 9.7 million ounces, 12% increase over 2006) surpassing the long time leader, South Africa with an estimated 272 metric tons. South Africa had been the world’s largest gold producer since 1905. Its also worth noting that local production in China has risen by about 15 percent a year in stark contrast to global production which in on the decline.
The USA can and probably will print more dollars to bail its economy out of the excesses of the property boom and subsequent credit crunch. To some extent, oil producers can pump more oil. It isn't so easy to find more gold.
Thereby, we can say that Gold is a preserver of wealth. It will not get you any richer but it holds its value against inflation. Just look at what goods an ounce of gold would have bought you 100 years ago. Compare that to what an ounce of gold would buy you today...roughly the same. Look at the price of gold in the 80s, then the 90s, now today. If you bought gold in the 80s you'd finally be breaking even.
Gold also acts as a hedge against financial/political turmoil. When financial/political turmoil levels are rising, so does the price of gold – consider gold as a protection to maintain your savings from collapsing currencies (gold can never go to zero). When financial/political turmoil levels are improving, the price of gold usually drops.
In my book, gold is also one of the few investments that does not involve a future promise to repay, as stocks and bonds and CD's do. This can be a very important property during difficult times.
In general, precious metals performance does not correlate with S&P performance, nor does it correlate with US bond performance, nor does it correlate with foreign stock performance. Thus precious metals can provide an additional element of financial diversity to any investment portfolio.
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My own personal philosophy involves selling out of investment categories that are entering downtrends and buying into investment categories that are in uptrends to keep average returns positive. Others will stick with one investment category through all of the ups and downs in hopes that the long term average will be positive. If you subscribe to the latter philosophy, and if you are going to confine your investment activity to a single investment category, then clearly precious metals is not the best long term choice. However, if you subscribe to the former philosophy, or if your investment activity is going to cover many different investment categories, then precious metals definitely have their moments!