Investment: Gold attracts a wealth of fans as the safe-haven metal continues to rise and offer opportunities

THE price of gold has been tipped to reach new record highs as worried investors pile into commodities in search of a safe haven. But the flight to caution has to be navigated carefully, advisers have warned, with investors urged to avoid staking too much on the precious metal.

The flow of money into gold bullion, mining companies and commodities funds has surged as investors, spooked by sharp market falls, inflation, sovereign debt crises and political wrangling, search for safe havens.

It's not the first time the gold price has risen sharply to new highs amid investor uncertainty in recent years, with record levels of demand behind price surges during the banking crisis. Those levels have now been surpassed, with investors flitting from one source of anxiety to another.

Alex Montgomery, head of asset management at Turcan Connell in Edinburgh, said: "We seem to move daily between worrying about one of: US sovereign debt; peripheral European sovereign debt; European banks; US economic weakness; emerging market inflation; western inflation or deflation.

"Or we are being encouraged by one of: corporate merger and acquisition news being seen as an indication of value in markets; corporate results and chief executive officers' statements about good future prospects; kicking sovereign debt cans down the road to defer resolving problems; and less-bad-than-expected economic data from the US or China."

Several highly regarded fund managers have expressed similarly mixed sentiments, including Trevor Greetham, director of asset allocation at Fidelity International.

He said: "The negative market reaction to the US debt deal and euro summit, supposedly good news events, suggests a downswing in global growth is gaining momentum – a view confirmed by our lead indicators."

They are not alone in feeling bearish about the outlook for the months ahead, rightly or wrongly, with some advisers edging into more cautious investment territory.

But what should individual investors do? Ideally, a diversified portfolio, with a mix of equities, cash, bonds, property and commodities, would mean you are well positioned regardless of what happens in global markets. But with confidence in short supply, there has been a surge of interest in safe-haven investments, offering more protection not only against market downsides, but also against the scourge of inflation.

The most popular safe haven in such scenarios tends to be gold. Gold prices are rising unchecked, prompting some experts to warn they can only climb so much higher. But we've been here before, with surges in the gold price at several points in the last three years.

The assumption on each occasion was that the price would fall back again pretty quickly, and advisers urged caution as investors jumped on the bandwagon. After all, one of the golden rules – pardon the pun – of investing is that the worst time to dive in is when prices are sky-high and everyone else wants a piece of the action.

Yet some believe that the price could hit $2,000 an ounce, or even $3,000 at a stretch, suggesting now would be the time to sell.

Gold currently has "all the hallmarks of an asset bubble", warned Graeme Forbes, chartered financial planner at Intelligent Capital in Glasgow.

He said: "It is a commodity and what we are seeing here is a classic 'bubble'. Prices may go higher and there may not be a crash but demand will reduce and prices with it, when the world decides that the recession is over and starts buying equities again."

But there are other factors dictating demand for gold, including inflation.

With much of the inflation we've seen in recent months effectively imported, through the rising cost of food and oil, investing in commodities such as gold, metals and grains can help investors benefit from that price inflation.

"Recent price rises have not been driven by consumer demand for jewellery, but by sovereign and institutional demand as a balance sheet shoring-up tool," said Forbes. "It's also a good hedge against inflation."

Its diversification factor is equally important, as it means gold isn't correlated with the performance of other asset classes. Deciding to invest in gold is one thing – how to do it is the next challenge.

Physical gold is one option, although buying actual gold bars is out of the question for most investors. It is possible to buy shares in physical gold, however, through the likes of Bullionvault (www.bullionvault.com), where investors can own fractions of gold bars that are stored in depositories in London, Zurich and New York.

Gold coins are more accessible, although there are several scams to look out for in this market, while insurance and storage costs can be a deterrent.

Then there are collective funds investing in gold and exchange-traded funds (ETFs). The emergence of ETFs, which track the gold price, has offered a useful low-cost route into gold for private investors.

Exchange-traded commodities (ETCs) also track the gold spot price but work slightly differently, letting investors buy a fund backed by physical bullion held in secure vaults.

A more conventional approach is to invest in unit trusts or investment trusts that invest in gold mining companies, among other commodities/resources stocks. Examples include the 2.7 billion JPM Morgan Natural Resources fund – which is up more than 45 per cent over the last three years – and the 2.9bn BlackRock Gold & General fund, up 63 per cent and 112 per cent over the last three and five years respectively.

However, fund investors haven't benefited significantly from the recent gold price spike, with equities underperforming physical gold in recent weeks. Like gold shares, funds don't offer direct exposure to gold, nor do they provide the same diversification from equities, particularly where gold is held among other assets.

Gold isn't the only commodity that can play a role as a safe haven, however. Silver, platinum, coal and even water are also accessible, albeit to a lesser degree.

"These are like property, in that you have something intrinsic in your hand, that can't simply disappear," said Forbes. "However prices rise and fall with demand, which can be based on real events and/or market sentiment."

He added: "Other 'safe' investments include government bonds and AAA-rated corporate bonds and we are seeing significant returns of 8 to 11 per cent a year on structured products, where significant levels of capital guarantee are underwritten by strong UK-based banks."

It is important to remember that while gold in particular can provide valuable diversification and protection against inflation, there is no such thing as a 100 per cent risk-free investment.

Cash deposits, where amounts up to 85,000 are guaranteed by the Financial Services Compensation Scheme, cannot currently provide any shelter against inflation, so you're effectively losing money over time. In terms of safety, National Savings certificates are as secure as it gets and very popular in the present climate, but the returns are variable and not always convincing.

Or you could go the opposite way, by viewing the current uncertainty as the perfect time to get into the market.

Steven Forbes, managing director at Alan Steel Asset Management, said: "For an investor it is a great buying opportunity, a bit like the stock market version of a January sale.

"For those already invested it is not a time for panic as the great thing about markets is that when prices get too cheap they start going up."