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No matter where in the world you go investors believe in gold. People may talk about things being as safe as houses, but for hundreds of years it is to gold that they have consistently turned when the way ahead looked potentially problematic. Such uncertainty has already descended on financial markets and investors are turning to gold in increasing numbers for refuge from weak stock markets, inflationary fears, rising energy costs, and worries that further volatility could yet destabilise the global economy still further.

Gold prices, which have risen around 18% this year, advanced closer to the $1,000 an ounce level this week, with spot prices hitting as high as $989.30. If you ask investors why they view gold as a default safety option you will get a number of explanations but a level of conviction that has endured despite opinions of many experts that gold was overpriced at $500, then at $600, $700, all the way through to the current record highs.

This collective demonstration of faith in gold from investors reminds me of a book I read a few years ago, The Wisdom of Crowds, by American James Surowiecki, a writer for the New Yorker magazine. The book basically explains why large groups of people are ‘smarter than an elite few’. With four basic ingredients – diversity of opinion, independence, decentralisation and aggregation – a large group can be more intelligent than the most intelligent individual among it, and extremely adept at using that collective wisdom to solve all sorts of problems.

Crowd wisdom, however, must not be confused with ‘groupthink’, in which apparently intelligent members of a group prize consensus, and to get it they suppress any contrary viewpoints to avoid conflict, a formula that often leads to bad decisions. This perhaps explains the government’s sale of 395 tonnes of the UK’s gold reserves in auctions between 1999-2002 at an average price of $275.6 per ounce. Gold has since risen in value by 256%, ‘a rate of return which would bring pride to even the cockiest of hedge-fund superstars,’ as the BBC’s business editor Robert Peston puts it. Or put another way, the UK sold 395 tonnes of gold from our official reserves for $3.5 billion, barely a quarter of the $12.5 billion that it would fetch today.

In contrast, crowd wisdom has shown that investors had been buying gold long before the credit crunch knocked financial markets for six at the beginning of last autumn, as the one year chart of Streettracks Gold Trust (see page 17) shows, the trust’s shares rising from about $62 to the current $97-odd. Over five years Streettracks Gold shares have soared from barely $40, suggesting the the market started buying into gold just as Gordon Brown, our then Chancellor, was crossing the ‘t’s and dotting the ‘i’s on a swathe of sales.

Of course, a common mistake will soon begin to repeat itself. People will say, oh gold has had a good run, it must be time for a fall soon, as if it were the modern equivalent of Europe’s famous tulip frenzy of the 1600s – when a single one bulb sold in Holland for 40-times the country’s average family income. But while those tulips were nothing more than an irrational and speculative bubble, gold is a genuine asset class in itself, and its value will remain high for as long as the market perceives it capable to delivering better returns over other asset classes.

Despite the assertions of some, today’s gold is not the tulip of 400 years ago. While there are many who believe in gold, not everyone is believing and buying. What we’re seeing in the market is not a bubble-blowing frenzy fuelled by crowd madness but a calculated shift to a safe harbour in troubled times given the modest outlook for equities, likely dull returns on bonds and potentially dismal short-term prospects for property. No doubt once many of the current uncertainties are ironed out, or at least become quantifiable, gold will start to lose its lustre and the ‘wise crowd’ will act in the opposite direction. But for the time being, it looks like the metal’s detractors that will end up running for the shadows in these golden years.