There were plenty of fireworks for gold this year, not the least of which were provided by record prices. The London fixed price of gold hit $1,895 twice, in early September, and around the same time, spot gold prices for immediate settlement, also known as gold futures, briefly cruised to $1,916 per ounce.

Investors who bought gold in 2011 were richly rewarded. There have been few periods in which gold's value moved down instead of up. Year to date, the price of the precious metal has climbed about 25%.

But gold investors typically are less concerned with the past than they are curious about the future. Specifically, what will 2012 hold for investors in precious metals and other commodities?

In a nutshell, it should be more of the same, with commodity prices lifted by strong demand from risk-averse investors, the prospect of inflation and hopes that gold prices will hit a record.

Let's take a look at these three issues in more detail, and consider the best ways to profit from these factors.

The fear factor

The correlation between rising gold prices and rising market uncertainty is clear. Gold's appeal rises when people are unwilling to take risk in the stock market or fear political and economic shenanigans are devaluing paper money.

When you are more concerned with finding a place to store your money safely than growing it aggressively, gold is your fallback option.

Look at a history of gold prices and you'll see that the biggest rises came amid some of the biggest periods of uncertainty. Adjusted for inflation, the real record price for gold is roughly $2,500 in today's dollars, based on peak levels of the precious metal in 1980, when the Cold War was raging, inflation was sky high, the savings-and-loan crisis was heating up and expensive oil threatened the global economy.

The reasoning is simple: Gold has been valuable since the days of the pharaohs and will remain valuable as long as it is a rare commodity.

What uncertainties lie ahead? On the short list are the ever-raging eurozone debt crisis, the prospect of a debt crisis and further credit downgrades in the United States, persistently high unemployment, geopolitical unrest as a result of the "Arab Spring" and the turmoil of the 2012 presidential elections.

Seems like fear will be in favor in 2012, which bodes well for defensive investment strategies and gold investors.

Inflation worries

Because of monetary policies in the United States, including quantitative easing and ultralow interest rates, the inflationary picture is looking ugly to many investors.

Here are some headlines to chew over:

  • In November, the average cost of Thanksgiving dinner jumped by 13% over the previous year.
  • The annual inflation rate peaked at a red-hot 3.9% this fall, and it has since cooled to "only" about 3.5%.
  • Many experts, including renowned Quantum Fund founder Jim Rogers, criticize inflation methodology, saying it paints a rosier picture in order to protect politicians. If Rogers' criticism is valid, the inflation outlook is even more disturbing than the numbers suggest.

The biggest fear during the financial crisis was a Japan-style deflationary spiral, where falling prices lead to decreased demand, which leads to falling prices and so on. The United States has tried to inflate its way out of such a disaster. It worked. But now we are left with the hangover of inflation, and that is going to take time, policies and patience to resolve.

In the meantime, buy gold.

Stocks and funds mentioned in this article: SPDR Gold Shares (GLD, news), SPDR S&P 500 (SPY, news), iShares Gold Trust (IAU), Goldcorp (GG, news) and Randgold Resources (GOLD, news).