ALTHOUGH it acts as a good diversifier gold is notoriously unpredictable. However, it is attracting attention as it is one of the top-performing asset classes of the year so far, rising in value by over 25 per cent in the second quarter before consolidating its gains last month.

With the prevailing low and falling interest rates in the US, Europe and elsewhere cash has not been on many investors radar screens in recent years. Gold does not pay most investors any interest so you have to hope someone else will pay more for your gold in the future in order to make a profit.

In a world where central banks have been printing money and government deficits have ballooned, the appeal of gold to investors is easy to understand. Although gold was stagnant for over a decade in the 1990s its price soared during the financial crisis.

Unprecedented money printing by central banks and soaring government deficits have provided a fertile backdrop by encouraging investors to seek out alternative forms of money authorities are unable to debase.

It is interesting to note that central bank buying of gold for their reserves is at its highest level for 50 years, which begs the question: do they know something we don’t?

The dramatic price rise was driven not only by quantitative easing and the printing of money but also by savers who were worried their banks might go bust and therefore turned to gold as a safe haven.

Gold prices are also driven by the economy, so it is possible to form a view of the price in relation to economic news-flow. So, it is also possible that gold prices rise when economies are buoyant and there is increased demand for jewellery and industrial use.

However, despite the economic slowdown in the past year global investor demand has grown by 4%. Normally gold rises when inflation takes off, but we have not seen much inflationary pressure if the statistics are to be believed.

Gold also tends to perform well in times of geopolitical crisis and may have been performing well due to the political unrest we have seen around the world such as the protests in Hong Kong and elsewhere.

One further reason gold has been performing so well for UK-based investors is that it is priced in US dollars and has risen as sterling has fallen on hard-Brexit fears. As a consequence, last year investor demand in the UK grew by 12%.

So, what are the best ways to invest in gold? There is always gold jewellery, but for those looking for the security of physical gold most people turn to gold coins such as Britannias or Krugerrands. While this will lead to additional costs of storage and insurance, buying investment-grade bullion is stamp-duty free and VAT exempt. British gold sovereigns are also exempt from capital gains tax.

A more recent feature is allocated gold accounts, which allow investors to buy gold coins and bars from a bullion brokerage to be transferred into their account in a depository or bank. Allocated accounts involve ownership of specific gold and the owner has title to the individual coins or bars. Due diligence should be done on allocated gold account providers and the history, security, credit rating and net worth of the provider is of vital importance.

An alternative is to buy gold exchange-traded funds, which trade and are taxed like shares and are backed by physical gold held in bank vaults and therefore accurately track the gold price.

You can also invest directly into gold mining shares. Or, to reduce the risks, a diversified fund specialising in this area of the market. This is effectively a geared investment since gold prices have a greater impact on the profits of gold miners and can be a good strategy if prices rise.

Essentially, for investors prepared to live with gold’s unpredictable nature and volatility, its low correlation with other assets can both reduce risk and enhance returns.

David Thomson is chief investment officer at VWM Wealth.