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Your support makes all the difference.The World Gold Council will tell you that gold is the only commoditythat holds its value against inflation. Gold cannot be inflated by printing more of it, and it does not depend upon anyone's promise to pay. In short, gold is the "ultimate asset".
Yet gold has never really been taken seriously as an asset class by the Western world.
In recent memory, perhaps the only time gold was viewed as a viable alternative to equities and fixed interest instruments was during the late 1970s and early Eighties, when Swiss bankers persuaded financially naive, cash-rich Arabs to invest their oil money in gold.
This dubious advice pushed the gold price to an all-time high of $850 an ounce. The jewellery industry could no longer afford to buy gold and, as oil prices subsided, the gold market collapsed. An ounce of gold today is worth less than half what it was then.
Because the boom in gold prices came at a time of high inflation, many people believe that it is only worth holding gold if inflation is high. Perhaps that is the case, but the argument does not hold true for gold funds, which are invested in gold mining stocks.
Of all the 1633 unit trusts available, the Mercury Asset Management (MAM) Gold and General Fund has been the top performer over the past three and five years, and is still second best. If you hadn't invested pounds l,000 in that fund five years ago, you would have every right to kick yourself today, for that pounds 1,000 would now be worth pounds 3,470.
Waverley's Australian Gold Fund was fourth until recently and is still 27th.
Two gold funds in the top 30 cannot just be a happy coincidence. So what lies behind the startling success of gold funds, given that inflation has been relatively low and the price of gold has barely moved in the past twelve months?
There are currently 12 gold unit trusts in the FT Gold Mines Total Index. Their exposure to gold comes via investment in mining companies around the world. They are not permitted to invest directly in bullion. Stock picking is perhaps more crucial here than in any other type of fund, for in simple terms the fund manager is hoping to back companies that will strike gold. When they do, the returns can be astronomic.
"The reason for the dramatic outperformance of some gold funds is that the world's entire gold pot is so small," explains Julian Baring, fund manager for the MAM's Gold and General Fund.
"There are not many gold funds to invest in, and when gold is in favour huge pressure is put on a very small market.
"The funds, in effect, are geared. When the price of physical gold goes down, shares in gold funds plummet, but when it goes up, gold funds are like coiled springs waiting to explode."
When the gold price did rise slightly last December from around $395 to $415 an ounce, the gold fund index went up by a disproportionate 44 per cent.
While gold funds do not invest directly in bullion, their fortunes rely very much on the price of the physical metal, because mining companies will not waste money looking for gold if there is no underlying demand.
But demand there is. In many eastern countries - particularly in China and India, where in many villages you are more likely to find a jewellers than a bank - gold is considered a savings medium.
These economies are growing far more quickly than those in the West, and they are increasingly in a position to buy gold.
The gold price has also remained strong in Japan, where an investor depositing gold at a bullion bank can get a return five times as great as he would have done depositing cash at another bank.
Despite this strong demand, the price of gold has not increased dramatically.
This is partly because the demand can be met through central bank sales, but mainly because the gold-mining industry increasingly sells gold forward to guarantee a price. In effect, more gold is put on to the market than would otherwise have had to be absorbed. As a result, the price of gold hasn't made much progress.
"The gold price does not fluctuate that wildly because inflation is under control in most of the world's major economies," explains David Hutchins, fund manager of M&G's Gold & General Fund.
"But there is a strong demand for the physical metal, and demand has outstripped newly-mined supply for the past five years. That gap is widening and this is good news for gold funds."
Such funds, however, are not for the faint-hearted, and MAM's Julian Baring sums up the sort of investor to whom gold funds may appeal.
"They are unsuitable for poor people who would like to be rich," he says, "but entirely suitable for rich people who are prepared to risk being a little poorer in expectation of a big return."
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