Gold as an investment
There are those who point to the 1980 peak gold price of $850/oz and observe that the price would have to go up to $2149/oz just to get back to that point (after inflation). I say, take a second look at the data.
The graph above shows the inflation-adjusted price of gold in dollars per ounce from 1913 to 2006 (adjusted to 1983 dollars). I don't think any sane reading of the data supports the 1980 peak as the "normal" price to which gold will inevitably return. The long term average price of $209/oz (again, 1983 dollars) looks like a rather more reasonable "normal" price to me. In today's dollars that would be $436/oz.
This makes sense, given the nature of gold as a store of value.
I think there's a good case to be made for holding gold as a hedge against both inflation and catastrophe. But I think any purchase of gold should be made with the expectation that prices will tend toward the historic average price. Since gold is trading well above that price now ($664.75 at yesterday's London fix), buying gold today only makes sense if you expect your next-best investment option to lose more than a third of its value.
Gold price data from wrenresearch.com.au
Inflation data from the Bureau of Labor Statistics