Ken Taylor: There's a good reason winners are awarded with gold: it's solid

AROUND the time of the election last month, there was close scrutiny of the markets for any indications of the impact that the political outcome would have on investors.

But what can now be concluded is that the election was very much a side issue as far as markets were concerned – far greater forces were in play and continue to be.

The greatest single theme of this year is sovereign debt and how it influences markets. We have had the very real panic surrounding Greece and its desperate need for fiscal support. The emerging reality of the euro potentially falling apart as a major global currency has understandably rocked markets and contributed to a growing level of fear among investors. Spain has been downgraded by the ratings agencies, and there now lingers a real suspicion that there may be more demand on the wealthier northern European countries to once again bail out their faltering neighbours.

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And just in case anyone assumes this is not an issue for the UK, always remember that the Eurozone is our biggest export market.

All of the above have led me to introduce a theme into client portfolios that I never previously imagined would be appropriate – physical gold.

I am sure that most of us will by now be aware of the phenomenal demand for gold and the regular reports of the price being at an all-time high, so it is worth providing some reasons why I believe it is worth a place in anybody's portfolio.

First, the reporting of the record price for gold is misleading. In inflation- adjusted terms, it actually achieved twice its current price in 1980. So any suggestion that it cannot rise in price from here is unlikely to prove correct. Secondly, demand for gold continues to increase. It is the classic safe haven in times of currency volatility, and is also seen as a hedge against inflation, should this return to the system in a meaningful way. So in uncertain times, gold tends to be a smart hold.

Another reason that supports buying gold at current prices is clear evidence that the bulk of demand continues to be from institutional buyers. As such buyers tend to be ahead of the retail customer, it may be concluded that any bubble has yet to inflate. It is also worth noting that pension funds have yet to buy into gold, which could further boost demand. Historically, pension funds buy gilts to match future liabilities, but one of many myths that the last two years has corrected is that gilts are by no means risk-free assets.

Much of the above justification tends to view gold as a defensive position to hold in a portfolio, and that is no bad thing in the current climate. But I believe that anyone buying into gold at current prices might well be pleasantly surprised with the returns achieved over the coming months and beyond. Assuming demand continues to rise, the price is highly likely to increase as we are talking about a precious metal that is becoming increasingly difficult to mine. So supply is unlikely to be able to satisfy demand, resulting in a higher price.

Perhaps the final reason for considering gold as an investment is that it remains largely immune from government intervention. This is hugely significant, and was recently summed up beautifully by a leading fund manager who knows the commodities market better than most. He quoted George Bernard Shaw as saying: "You choose between trusting the natural stability of gold and the natural stability and intelligence of members of the government. With due respect, I advise you, for as long as the capitalist system lasts, to vote for gold." I for one have to agree.

• Ken Taylor is director of Mackenzie Taylor Wealth Management