If the so-called gold bugs, investors who believe passionately in the long-term value of buying gold, are right, then this could be a good time to add a little glitter to your portfolio. Over the last five years the price of gold has more than doubled from US$250 to US$574 a troy ounce and it is still nowhere near its all time 1980 high of US$850 a troy ounce. In fact, there are many who believe it could double in price AGAIN!

Just because gold is cheap now when compared to 25 years ago doesnt automatically mean that it is a good investment. However, there are three sound reasons to believe that prices will continue to soar.

Firstly, the growing economies of Asia and the Middle East have resulted in a huge surge in demand especially for gold jewellery. For proof one need look no further than global gold jewellery sales, which increased by 19% last year.

Secondly, a rising number of private investors all over the world have been putting some or all of their savings into gold as a hedge against economic or political instability and, in some cases, war. When investors feel the future is uncertain (as many appear to at the moment) demand for gold always surges. This is doubtless in no small part due to the fact that the price of gold tends to move in the opposite direction to virtually all other conventional asset classes making it ideal when investors wish to diversify.

Thirdly, the mining industry cant keep up with demand. Last years figures show that in excess of 4,000 tonnes of gold were purchased, but only 2,500 tonnes were mined. Whats more, production is falling by an average of 4% a year and it will take the industry anything up to ten years to increase supply by the required volume. In the past, when demand outstripped supply, the shortfall was met by many of the worlds central banks. No longer. Countries, which had been disposing of their gold reserves, have slowed down sales or even stopped selling altogether. Some central banks, notably those of Russia, Iran and China, are actually believed to be buying bullion.

Although I believe that gold prices are likely to carry on moving upward, I would only suggest buying if you already have a range of other investments including shares, bonds and property. Furthermore, I wouldnt necessarily advise buying gold coins or gold bars. The idea of owning a little hoard may seem attractive, but gold in all its forms is expensive to ship, store and insure. Instead you may like to consider investing in one of the various gold mutual funds. These offer a cost-effective, convenient and potentially more lucrative way to benefit from any increase in golds value.

A good example of what a mutual gold fund has to offer is the top-performing Merrill Lynch Gold & General Fund which has produced an average annualised gain of 33.9% over the past five years and which is up around 1000% since its launch in 1988. The bulk of the UK855 million fund is invested in gold mining shares. Obviously, gold mining shares rise in line with the value of gold. Your risk is diversified and you can leave it up to the fund manager to choose the best opportunities. There are plenty of funds to choose from and you can pick a fund that matches your own objectives. One fund might aim to track the price of gold, for instance, another to track one of the various market indices such as the FTSE mining index.

Speaking of the FTSE mining index, which outperformed the FTSE all-share index in 2005, if you have plenty of capital at your disposal an alternative option would be to buy a portfolio of individual mining company shares. On the upside this will give you greater control and involvement. On the downside you will have to decide which of the hundreds of different mining company shares to buy.

There is one further possibility worth considering. Invest your money in one of the exchange-traded funds (ETFs) for gold. An ETF is listed on the stock market and allows you full exposure to the price of gold, without actually having to take delivery of the bullion. The fund buys and holds the gold, while the investor holds ETF shares. The worlds biggest ETF is Exchange Traded Gold (marketed under different names) which holds 431 tonnes of the yellow metal. This is more than the Bank of Englands reserves.

One of the most senior industry experts in the world, Robert McEwen of U.S. Gold, was recently reported as predicting that gold prices may reach US$2,000 an ounce by 2010. If he is right, you could be kicking yourself for not getting into the market whilst prices are still relatively low.