Gold is attracting growing interest from a small number of pension funds, some of whom may already be building their exposure to gold, usually as part of a basket of commodities. Why is gold attracting people? And why is it that people love to invest in gold?

Find out here why gold lures people:

Why do people invest in gold?

People around the world invest in gold for many different reasons. Many people view gold as a reliable source of value in times of trouble. Gold offers insurance against stock market failure and has proved to be a liquid, transportable asset for refugees needing to flee their countries.

More and more people understand that by investing in gold, they are protecting themselves against a range of risks, such as weakness of the US dollar; unexpected inflation; and low returns on other assets. Some people simply want to own as asset they can trust, because it is real and holds its value over the long term.

Is gold really a good hedge against inflation?

There is substantial evidence to support the view that gold is a good long run hedge against inflation. In the short-run, the gold price may deviate from its long run inflation hedge value, and may take a number of years to revert to this constant. Gold is not a perfect hedge against inflation, but it is the only hedge that has been tried and tested over centuries that have seen currencies rise and fall.

Is gold a global currency?

Gold has retained its role as a monetary asset. Central banks around the world still hold around 12 per cent of their reserves in gold, and even private individuals can and do use gold to settle payments. However, gold is not "issued" by any particular government and is not beholden to any political regime. In this sense, it is a truly global, international currency, free of political or national association and liability.

Is gold a commodity?

Gold is used for different purposes, and these certainly include commodity uses. Industrial applications of gold account for about 10 per cent of demand each year. Demand for gold as jewellery absorbs around 75% of the gold supplied to the market each year, with the balance made up by investment. Gold is certainly included in the leading tradable commodity indices. So for many practical purposes, gold is viewed as a commodity.

How can gold be both a currency and a commodity? Isn't this a contradiction?

For most of history, currencies have been backed by commodities, or metals were used as money directly. Even today, when national currencies are no longer backed by real assets, gold maintains its value as an independent, international currency but at the same time is used as a commodity, and certainly viewed as a commodity, by many investors around the world. Gold's ability to play this dual role successfully underpins its usefulness to investors.

Is gold a high risk or low risk investment?

In general, gold is considered a low risk investment because its price is typically not very volatile. The gold price tends not to fluctuate more than the world's largest blue-chip stock market indices like the S&P 500. That is why many investors with low-risk profiles are attracted to gold. However, investors in high risk assets also find gold useful because they can use it to manage their risk.

What types of returns does gold offer investors?

Although very large investors can lend their gold out and receive a "gold" interest rate, in practice this yield is very low. So the main return on gold is capital gain or loss which is realised by selling some gold. This is no different from many other assets, including, for example, zero coupon bonds.

How big is the gold investment market?

In 2005, the overall gold market saw inflows of $ 56 billion, of which nearly US$ 9 billion represented investment flows. Ultimately, the size of the gold investment market is some proportion of all the gold that has ever been mined. On this basis, gold represents around 4 per cent of the market capitalisation of global bonds and equities.

How can I invest in gold?

There are many ways to invest in gold and these are explained fully on www.gold.org/value. How an individual chooses to invest in gold depends on the size of the investment, his/her reason for investing, and the purpose of the investment. People invest directly in bars and coins; through gold futures, options, warrants and certificates.

They may also hold gold in metal accounts with their bank in just the same way they could have a foreign currency account. The most popular, fastest-growing form of gold investment is also the newest: gold traded in the form of a security on stock exchanges around the world, generally referred to as "gold ETFs".

It is appropriate for pension funds to invest in gold?

Gold certainly merits the attention of pension funds who are seeking good portfolio diversifiers and wish to reduce the volatility of their returns, particularly in response to changes in International Accounting Standards and as part of a liability-matching strategy.

Gold is attracting growing interest from a small number of pension funds, some of whom may already be building their exposure to gold, usually as part of a basket of commodities.