Despite its reputation as a perennial long shot in the race for investment performance, gold has once again come through with a respectable return this year. At the time of this writing the price of gold has increased by 12.3 percent so far this year, far above the 1.3 percent return registered by a market-weighted basket of the other major commodities. Gold’s performance also stacks up reasonably well against the S&P 500 index return of 15.8 percent and the MSCI World Stock Index return of 13.4 percent year-to-date. Over the past three-year period, the price of gold has increased by about 77 percent, more than double the return provided by an index of global stocks.With gold now trading within a couple of percent of its twelve-month high reached last November, investors may be wondering if it is too late to join the party or maybe even time to begin selling. However, before jumping to a quick conclusion, it might be worthwhile to take a step back and contemplate the longer term thesis on investing in the world’s most popular precious metal.First of all, gold has a history — a long one. Records of gold have been found as far back as the 4th millennium BC or the beginning of recorded history. In fact, some of the oldest known gold artefacts were found in what is now Bulgaria, suggesting that gold mining could be at least 7,000 years old. Later on, gold became quite main stream as a popular vehicle for facilitating the trading of goods and services. Early gold mongers included the Egyptian pharaohs who found their supplies in various parts of the Middle East including parts of the Upper Nile near the Red Sea and the Nubian Desert.A brief review of the long history of gold is more useful when comparing it to the much shorter period of time that people have been using ‘fiat currency.’ Fiat currency, or paper notes and coins (and now electronic entries) are what most people use to exchange goods in today’s world. While this form of transaction is mainly what people now know, so-called fiat currency has only been around since the 11th century. The Song Dynasty in China was the first to experiment with paper currency. Interestingly, this first test of paper money in Asia ran into trouble when rampant money-printing caused hyper inflation which ultimately led to the termination of the money system by the Ming Dynasty.Of course paper money eventually rose again to become the primary median of exchange for trade, although most of the earlier forms were backed by precious metals including gold and silver. As civilisation expanded and trade became larger, fiat currency backed by precious commodities was much more convenient that carrying around tonnes of metal.While notes tied to precious metals evolved to become the norm, governments, eager to write checks in order to fund their pet projects, soon were not able to underwrite the shiny new bills with an equal amount of gold. The United States, in fact ended its ties to gold in 1971 with the termination of the Bretton Woods Agreements in 1971 due to the ongoing deficit payments required to finance the Vietnam War. Much earlier, in 1931 the UK had to abandon its dependence upon the gold standard for similar reasons.Coming back to today, many investors are confused about when and if ever to begin buying gold. After all, the gold price has increased in price by over 500 percent since early 2000 and, in fact, many pundits missed this extraordinary move. Gold has been moving again, but the most relevant question is whether or not the metal is overpriced now.Only time will reveal the exact answer to this question but one interesting observation is that in ‘real terms’ the price of gold has not really increased that much. Going back to 1980, the price of gold has actually declined over the past 30-odd years versus inflation. Of course, exact dates for measuring performance are critical, but the point is that by some measures, the yellow metal actually appears to have more room to catch up with the prevailing price of other goods and services.Mark Twain once said that ‘history doesn’t always repeat itself but it sometimes rhymes.” And clearly, those times in history when citizens of various countries began to seriously distrust the fiscal and monetary policies of their ruling governments, they quite frequently turned to gold as kind of an insurance policy against looming inflation, war, political upheaval or just plain old money-printing guaranteed to reduce the purchasing power of paper money. While it could be argued whether or not we are presently facing similar circumstances at the present moment, clearly government budget deficits and the need to issue more and more paper to fill the yawning budget gaps around the world have reached alarming levels.So another consideration is that today’s money printing policies are much heavier than most other periods in recent history. For example, since the beginning of the credit crisis in late 2008 the US money supply has increased by 60 percent and 27 percent as measured by the standard money supply measures, ‘M1’ and ‘M2’, respectively. Only recently has the price of gold begun to catch up with the cumulative increase in the money supply which has been steadily growing over the past few decades. Moreover, existing government budget gaps predict further ‘easy-money’ policies ahead.Investors have a few different ways to participate in gold. One traditional method is buying pure gold coins. The new gold standard is ‘Four 9’s’ coinage, or gold coins that are pure to the extent of possessing 99.99 percent gold with almost no alloys or other trace elements. These coins are issued by the major world governments and include the American Buffalos, Austrian Philharmonics, Australian Kangaroos, Canadian Maple Leafs and Chinese Pandas. As Bermuda’s only licensed investment grade gold dealer, the LOM Group regularly buys and sells these coins.Another, increasingly popular method for owning gold is by purchasing an ‘exchange traded fund’ or ETF. ETF’s generally track the price of gold and can be traded in any share increment with the click of a mouse through various online trading platforms. Some investors prefer the liquidity and simplicity of this method although the gold funds do charge an implicit fee of up to 0.40 percent extracted of the principal value of the fund. The largest gold ETF’s are the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU). Interestingly, the GLD fund is the second largest of all the available ETF’s on the market.And finally, another way to play the yellow metal is by owning stock in gold mining companies. In addition to the price of gold which affects corporate revenues, investors must also consider the companies’ volume of gold production, operating costs, price hedging strategies and market valuation. Despite the extra effort required to analyse individual companies in this sector the additional work may be worthwhile. An index of gold mining companies has dramatically underperformed the price appreciation of the metal itself over the past few years and these companies in the aggregate are trading at some of the lowest valuations seen in the past decade.Bryan Dooley, CFA is a senior portfolio manager at LOM Asset Management Ltd in Bermuda specialising in the areas of mutual fund portfolio management and quantitative process. He is a Chartered Financial Analyst, possesses an MBA from the College of William and Mary and has held key positions with progressive financial institutions worldwide. Please contact LOM at 441-292-5000 for further informationThis communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. The information contained herein, has been compiled from sources believed to be reliable, but no representation or warrant, express or implied, is made by LOM Asset Management Limited or any of its affiliates or representatives, as to its accuracy, completeness or correctness. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.