Follow the golden rules

Throughout history, gold has captivated nations and inspired legends across the globe, remaining an iconic symbol of enduring wealth and coveted for its rarity and mesmerising rich colour.

Gold was one of the first metals to be discovered by man around 7,000 years ago. It has long been held as a symbol of power, a medium of exchange and an inspiration for masterpieces of craftsmanship. Yet all the gold that has ever been mined would only fill a couple of Olympic swimming pools. Such rarity partly explains why the price of gold has surged in the past 12 months.

Gold is viewed by investors as a commodity in global demand, as having enduring features and as a proven asset diversifier. It usually acts in a reverse way to equities, which is appealing in times of stock market volatility.

Measured in US dollars per troy ounce, gold has oscillated in price between $712-$1,373 in the last two years. "This has all the makings of a bubble - and bubbles burst!" warns Iain Wishart, chartered financial planner at Wishart Wealth in Edinburgh. If looking for a fund as an alternative to the costs of buying and storing gold, Wishart tips BlackRock's Gold and General which he says is not "cheap", but has delivered consistently good returns.

The fund's exposure to silver and platinum has helped performance and provides some diversification. It has an 85 per cent exposure to mining stocks within the fund. .

Alistair Blyth, director at AB1 Financial Planning, has "some concerns as to whether the recent increase in the price of gold is sustainable in the long term and whether a correction might take place which could cost some recent investors to lose money". In 1999, the then chancellor, Gordon Brown, lost the taxpayer 7 billion by selling 395 tonnes of Treasury gold at the rock bottom average price of $275.60.

Demand for jewellery gold is likely to continue. This follows a long tradition. The Amesbury Archer basket earrings are the oldest examples found in Britain and date back to 2,470BC, while all royal wedding rings are made from Welsh gold. The South Crofty mine in Cornwall recently started to drill for gold again and is thought to have richer deposits than some of the major mines in California.

Max Horne, of Dunfermline-based Max Horne Group, recommends using an exchange-traded fund, which is a very cost-effective way to own an asset. He prefers ETFS Physical Gold, which is a fund that stores the gold bars in a bank-owned vault, so there is little counter-party risk.

Gold does not generate interest or a dividend, so savers look for capital growth.Coins, such as South African krugerrands, can be bought from specialist dealers at a small premium to the spot price but will need to be stored and insured. Bullion can be held in a self-invested personal pension but not at home. Instead it needs to be managed by a third party.