Gold has several completely different roles as an investment. These roles are so different that it?s useless to talk about them in the same breath. The expectations, the need-fulfilment and the types of investors are so diverse that one must distinguish these clearly in order to understand anything about this issue.

The first role of gold is that of being a store of value in the face of severe societal collapse, in a situation where the systems guaranteeing your paper ownership of other assets are collapsing. The second role of gold is as a short-term momentum play. In this role, you?re just hoping that the price will keep rising because, well, because it?s been rising.

There?s a story that people are telling each other, but there?s always a story in each momentum play, whether gold or copper or dotcoms, or whatever. Your best bet for making money in this way is to recognise the start of the bull-run early and start riding it and then, even more importantly, to recognise the end of the run early and get off in time. This is an important part of the role that gold is playing today.

The third role of gold is as a currency. What you are seeing around you is not really the rise in the price of a commodity, but the devaluation of various currencies against gold. The fourth role of gold, the one I believe that we are discussing today, is that of a long-term investment, something that can be part of your investment portfolio and compete with stocks over a period of years or decades. In this role, gold is useless.

The problem of analysing gold?s long-term performance is that gold has no history. I know that sounds weird because gold is supposed to be the second oldest form of wealth (after cows), but that was a different gold. Gold has changed fundamentally twice in the last four decades and it is dangerous to compare its performance across these changes.

The first change was in 1971, when the then US President Richard Nixon abolished the Bretton Woods system, detaching the US dollar from gold. Gold had spent the previous decade at a static price, became very volatile and eventually found its level at a much higher price. The five-year average price before this event was $38 per ounce, while that for the five years after this event was $114. The average price of gold in 1960 was $35, as it was in 1970. All the long-term returns that gold proponents show you are based on the simple trick of measuring returns from carefully chosen points before and after this event.

The second great fracture in gold?s history is harder to pin to a single year, but it basically happened during the previous decade. This is the financialisation of gold, during which gold?s tradeability and liquidity increased disproportionately because of the worldwide electronic trading of ?paper gold??derivatives based on gold.

The enormous rise in the price of gold over the last five years cannot be termed as an investment, in the same sense as buying the stock of a good company. Gold is an unproductive asset and its price will always be a reflection of events around it. At this point of time, gold is being driven by a story whose main element is fear?fear of some great calamity that is about to befall the world. The direction is driven by this fear, and the volume and the lubricated machine of global markets. Play this bubble if you like, but don?t think of it as an investment.

The author is CEO of Value Research

Vibhu Ratandhara

Gold generally does well in times of economic uncertainty, which we have been seeing since 2008. Despite being the world?s largest importer of gold, the per capita consumption of the metal in India is still low at just 0.7 gm, half of the US and one-third of the Middle East. Gold attracts most in Asian countries, especially in India and China, as growing wealth and stubbornly high inflation make the bullion an attractive asset. Data from the World Gold Council shows that India and China together made up 57% of Q1-2011 global consumer demand for gold.

In the international market, gold surpassed $1,900 per ounce this week, thanks to a weak global economy and an increasing EU debt crisis, which have diverted global funds towards safe haven investments like gold. The price of the metal moved up 45% since the start of 2011, of which a 30% rise was seen in the last two months alone. In fact, since 2000, gold gave positive returns every year thanks to the uncertainty in global markets.

The bull run in gold is likely to continue because of the weakening global economy, which is making investors diversify towards other assets classes, especially gold and silver. Secondly, interest rates in the US would remain at a near zero level till mid 2013 and as long as interest rates remain near zero in the US and the UK, gold is likely to benefit over the longer period. Moreover, the weakening of the dollar has made gold an alternate currency.

In India, investment purchases of gold have been rising faster than jewellery purchases as the latest data from WGC show the investment-to-jewellery ratio was about 17:83 in the first half of 2011. In the case of ETF, launched in 2007, the total collection among seven fund houses is over 15 tonnes, which nearly doubled the level a year ago. Though demand has been rising for gold, demand for jewellery is falling as more and more people are buying coins and bars. In fact, three years ago, 85% of gold consumption was in the the form of jewellery, which has now fallen to 70%. Clearly, there is a shift to long-term investment demand.

To prove why gold is a better option during uncertain times, one must look at gold holdings of central banks. Last year, central banks became net buyers of gold for the first time in 21 years. Central banks in Western Europe and North America reduced selling and emerging economies diversified their holdings of foreign currencies, especially the dollar. Going forward, deepening worries about debt crisis contagion in the Eurozone and uncertainties around US growth in the second half and its impact on the greenback will increase central banks? appetite for gold. In the first half of this year, central banks were net buyers of over 155 tonnes of gold, almost double the 87 tonnes of net purchases in 2010.

Still, there is more room for gold prices to go up if one compares them with inflation-adjusted prices. Gold hasn?t beaten inflation since its 1980 peak and it would need to rise to around $2,400 per ounce to just break even in real terms. Conversely, the S&P 500 has returned an inflation-adjusted average of around 8% per annum since then and there is more room for gold to rise faster than equity in the coming years.

Throw in sticky inflation, unimpressive equity returns and concerns over the fiscal health of developed economies, and gold is likely to continue its rally for at least 1-3 years from now until the global macro situation gets clearer. So, it is advisable to buy gold on dips rather than to go short.

The author is vice-president (commodities), Bonanza Portfolio