An Inflation Hedge
While many high-net-worth investors are worrying about how the recession will impact their portfolios, inflation remains a threat. While bonds and equities often perform poorly in a high-inflation environment, gold and commodities generally perform at their best. Since 1971, the U.S. Consumer Price Index has averaged over 5% in nine separate years. Domestic and global equities fell in five of those high-inflation years, rose in four, and posted an average decline of 0.5% over the nine years.

Long-dated Treasurys did not fare much better: They also fell in five years and rose in four, although they managed to post an average increase of 1.5%. Commodities, as measured by the Goldman Sachs Commodity Index, increased in seven out of the nine years and rose by 9% on average. Gold rose in six years, fell in three, and posted an average return of 31%.

How To Buy Gold
The gold market is deep and liquid and can be accessed by high-net-worth investors in many ways. Perhaps the most obvious way is to buy investment coins or small bars, available from bullion dealers around the world. Investment coins need to be distinguished from numismatic coins, whose price may include a premium due to their rarity or collectability. Coins and bars are available in a variety of weights and sizes, ranging from 1/20 ounce coins up to 400 ounce gold bars. Bars at the upper end of the range would need to be purchased from a bullion bank, rather than a retail coin and bar dealer.

Gold bullion banks also offer "gold accounts." When a customer orders gold, the bank will buy the gold on their behalf and book it to the account electronically. These accounts come in two forms: allocated and unallocated. An allocated account is like keeping gold in a safety deposit box. The gold is stored in a vault that is owned and managed by a recognized bullion dealer or depository. Bars or coins are numbered and identified by hallmark, weight and fineness, and allocated to each investor, who pays the custodian for storage and insurance. The holder of gold in an allocated account has full ownership of the gold and the bullion dealer or depository that owns the vault where the gold is stored may not trade, lease or lend the bars except on the specific instructions of the account holder. In an unallocated account, investors do not own specific bars or coins. Traditionally, one advantage of unallocated accounts has been the lack of any storage and insurance charges, because the bank reserves the right to lease the gold out. But this means that investors are exposed to the creditworthiness of the bank or dealer providing the service in the same way as they would be with any other kind of account. As a general rule, bullion banks do not deal in quantities under 1,000 ounces.

Gold exchange-traded funds are the newest way to buy gold. These combine the flexibility and ease of equity trading with the security provided by an investment in physical gold. There are several gold exchange-traded funds listed on stock exchanges around the world.

The largest is SPDR Gold Shares, or GLD, which is listed on the NYSE/Arca platform. SDPR Gold Shares represent an undivided beneficial interest in a trust, the sole assets of which are gold bullion. The shares are designed to track the price of gold, minus the expenses of administering the trust. The shares are 100%-backed by physical gold bullion, which is held in the form of 400-ounce London Good Delivery bars stored in an allocated account in the London vaults of HSBC Bank.  The fact that the gold is held in allocated form is one reason why GLD-like physical coins and bars-has proved so popular during the current credit crisis, as investors have balked at the idea of any form of counterparty risk.

Gold certificates also offer investors a method of holding gold without taking physical delivery. Issued by individual banks, particularly in countries like Germany and Switzerland, they confirm an individual's ownership while the bank holds the metal on the client's behalf. The client thus saves on storage and personal security issues and gains liquidity in terms of being able to sell portions of the holdings (if need be) by simply telephoning the custodian. The Perth Mint also runs a certificate program that is guaranteed by the government of Western Australia and is distributed in a number of countries.

Banks also offer a number of structured products on gold, while commodity exchanges offer futures and options. Investors can also gain an exposure to movements in the gold price by investing in gold mining equities directly or in gold funds. Gold funds are likely to differ in their structure. It would be misleading to equate investment in a gold mining equity with direct investment in gold bullion as there are some significant differences. The appreciation potential of a gold mining company share depends on market expectations of the future price of gold, the costs of mining it, the likelihood of additional gold discoveries and several other factors.

Gold has been valued as a global currency, a commodity, an investment and simply an object of beauty for thousands of years, but its unique investment characteristics make it just as relevant for today's high-net-worth investor.     

Natalie Dempster is head of investment, North America, at the World Gold Council, an organization formed and funded by the world's leading gold mining companies. For more information visit www.invest.gold.org.