Why Gold

For centuries, gold has been coveted for its unique blend of rarity, beauty, and near indestructibility. Nations have embraced gold as a store of wealth and a medium of international exchange; individuals have sought to possess gold as insurance against the day-to-day uncertainties of paper money.

Perhaps more importantly, in the past few years, gold has finally been treated as an asset class that investors must keep as part of their portfolios. Investment in gold can be in the form of physical gold bars (nuggets), paper gold, gold company shares, gold investment funds (mutual fund), gold futures and options.

Monetary authorities such as Central Banks and International Monetary Fund (IMF) have long held gold in their reserves. The public takes confidence from knowing that its Central Bank holds gold - an indestructible asset and one not prone to the inflationary worries overhanging paper money. Some countries give explicit recognition to its support for the domestic currency. Moreover, rating agencies will take comfort from the presence of gold in a country's reserves.

Gold is sometimes described as a non income-earning asset. This is untrue. There is a gold lending market and gold can also be traded to generate profits. There may be an "opportunity cost" of holding gold but, in a world of low interest rates, this is less than is often thought. The other advantages of gold may well offset any such costs. The opportunity cost of holding gold may be viewed as comparable to an insurance premium.

As for private individuals, nobody is suggesting that one should put 100% of their assets into gold investment. In any asset portfolio, it rarely makes sense to have all your eggs in one basket. Obviously the price of gold can fluctuate - but so too do the exchange and interest rates of currencies held in reserves. A strategy of reserve diversification will normally provide a less volatile return than one based on a single asset. Most investment consultants suggest exposure ranging between 10 and 35%.

The European Central Bank (ECB), for example, holds around 15-20% (depending on the market value) of its reserve in gold.

The question is not why, but rather how and how much.