Gold has worked down from Alexander’s time. When something holds good for 2,000 years I do not believe it can be so because of prejudice or mistaken theory.”

So wrote Bernard M Baruch, the famous American financier, who lived and worked through a few crises including the Great Depression of the 1930s.

It seems that many investors are rushing to the perceived safe haven of gold during the current recession. Uncertainty over the state of the economy, plummeting share prices, pitiful interest rates and fears over the vulnerability of even the biggest banks have all lead investors to return to the old ways of physically holding gold to protect themselves.

This is reflected in the fact that sales of gold to retail investors has increased by 33 per cent in the first three months of this year. Since the start of 2007 the price of gold has risen from $600 an ounce to nearly $1,000 in February this year. It is currently trading around the $940 an ounce mark.

One of the paradoxes of investing in gold is that it is seen as a hedge against both inflation and deflation. It also seems to have an inverse relationship with the value of the dollar, particularly in times of economic stress.

All these make theoretical sense. In times of inflation the value of money reduces, but there is a finite supply of gold so its value will not reduce in the long term, in fact it should increase.

Gold has the advantage of being one of the few assets that is not also someone else’s liability unlike shares, corporate bonds and even cash deposits. So there is no danger of you losing everything if a bank goes bust for example.

When the world moves into recession, the feeling has been generally that world’s largest economy, the USA, is going to suffer more than others. Therefore, large investors, including other countries’ treasury departments, start offloading their holdings of dollars and will tend to buy gold as a safe replacement.

However, the historical statistics are very sketchy in backing up any of these theories. The relationship with the dollar has been true in the past but only in the short term during recessions.

In real terms, allowing for inflation, the price of gold is the same as it was 30 years ago. It turns out that equities, property and many other assets are much better for protecting your investments against inflation.

The main benefit of investing in gold is that it is a hedge against uncertainty. When everything else is going to hell-in-a-handbasket, investors basically get scared and like the thought of having an investment which is physical and tangible, and has all the historical connotations of wealth and status.

The last time the gold price went through the roof was in 1980-81, the time of the last major global recession which was also a time of great political and social change in the West.

From that point the value steadily declined, with the occasional spike, to 2001 and the famous “Brown’s bottom” when the then Chancellor sold off half of Britain’s gold reserves at the bottom of the market. Since then the price has steadily increased before accelerating over the last 18 months.

Many investment experts are predicting that gold will go to $2,000 an ounce in the near future as long as the economy remains troubled. The basis for this appears to be that this would be a return to the levels seen in 1980 allowing for inflation.

They may well be right, but a note of caution needs sounding. The main demand for gold comes from jewellery and manufacturing industry. Demand from the jewellery trade is down a third over the last year and industry is hardly in a position to be increasing demand.

A large proportion of any further demand could be purely from speculation. Which means that while prices may rise substantially, they are also likely to take a large drop in the medium term, as they did after 1981.

Newspaper columnists started talking up gold as an investment in early 2008. A German bullion-dealing firm recently introduced gold vending machines into European airports. This is mainly a marketing ploy to advertise their services, but these are both signs that we could be entering an asset bubble. Money can be made during asset bubbles, but it takes greater reserves, nerve and timing than most private investors possess.

That’s not to say that gold is not a good investment for a portion of a diversified portfolio, but if it’s to be held as physical gold it has to be viewed over the very long-term.

Commodity cycles generally run for between 15-25 years. Perhaps a better way for private investors to gain exposure to gold is through natural resources funds like Black Rock Gold and General or JPM Natural Resources. These buy shares in mining companies, including gold miners, which benefit from rises in commodity prices but also from well run companies or new gold strikes.

Alternatively, Exchange Traded Funds (ETFs) are available which track the gold price index or give you a share of a pooled stock of gold. The primal attraction of a shining, heavy bar of yellow metal still resonates strongly for many investors. But successful long-term investment is based on removing emotions from transactions. All that glistens may not be gold, but gold does not always glisten.

Trevor Law is a director with Montpelier Group (Europe) Ltd, the privately-owned independent financial advisers located at Barston near Solihull. E mail: