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Did you ever think you would see a run on a bank in your life time? The answer for the vast majority of IFAs and wealth managers would have to be a resounding no. Yet Northern Rock happened and – as Alan Greenspan, Paul Volcker, George Soros, Warren Buffet and others have warned – we are now facing the greatest financial and economic crisis since the Great Depression.

IFAs and wealth managers are confronted with unprecedented macroeconomic and systemic risk. The IMF has warned that if another major bank fails it could take down four or five of the world’s largest 15 banks with it. Obviously this has serious ramifications for the stability of the global financial system and economy.

Did you ever think you would see oil rise some 1000 per cent in a matter of years to more than US$110 a barrel and see the spectre of serious inflation or, worse, stagflation? Ben Bernanke, the Federal Reserve chairman, recently warned of the risks posed by slowing economic growth and rising inflation.

Commodity prices, including base metals and soft commodities, are surging and the dollar continues to depreciate and this is causing real inflationary pressures. Inflation will dramatically affect the value of bonds and cash and prudent wealth managers need to look to assets which perform well in such a macroeconomic environment. Gold thrives in such conditions as was seen in the 1970s when it rose from $35 to $850 for a return of nearly 2500 per cent in just nine years.

As all good portfolio managers know, the most important factor affecting long-term investment performance is asset allocation. In order to achieve a diversified portfolio, the manager is looking for non-correlation of assets.

Recent studies – for example by Jastram and Smith, Colin Lawrence and Knox – have concluded that gold bullion was not only negatively or insignificantly correlated with equities and property, but that it was not related to macroeconomic variables such as GDP and that it is a good hedge against adverse inflation and interest rates.

Gold is an extremely effective portfolio diversifier and it has been rising in all major currencies including sterling and has performed extremely well for UK investors. The last time we had similar conditions to today – slowing growth and rising inflation in western economies – gold rallied very sharply in all international currencies.

Gold rose from below £20 an ounce in 1971 to £300 an ounce in 1980 or a rise of some 1500 per cent. Were gold to replicate its performance of the 1970s again, gold would soar to multiples of the multi-year low in sterling below £200 an ounce in 1999, when Gordon Brown very short-sightedly and imprudently sold much of Britain’s gold reserves. Many analysts expect gold, at the very least, to reach its inflation-adjusted high of more than some £900 an ounce and $2000 an ounce in the coming years.

Private investors can invest in gold through a variety of very different mechanisms. These include exchange-traded funds, equity-based unit trusts and investment trusts, allocated and unallocated accounts and government gold certificates.

Importantly, investment grade gold bullion and gold certificates are stamp duty free and now tax free, Vat exempt, in the UK and EU due to the EU Gold Directive of 2000.

The Perth Mint Certificate Programme is the only government-owned and run gold certificate programme in the world, and is one of the most popular ways for investors to invest in gold bullion or own gold in their pension fund. Western Australia’s Perth mint is one of the oldest operating mints in the world, established in 1899, has a AAA rating from Standard and Poor’s and holds about $1.5bn worth of gold bullion. The gold bullion is insured at The Perth mint's expense by Lloyd's of London.

The Perth mint is the only depository operating today that can offer you a government guarantee of one of Australia’s wealthiest states, Western Australia.

IFAs and wealth managers need to be aware that ETFs are great products but they are costly for investors wishing to diversify and invest for the long term due to their annual fees.

Also it should be remembered that funds investing in gold mining stocks are not the same as owning investment-grade gold bullion stored in an AAA rated government mint. Gold mining equities tend to be more volatile and are more risky than gold bullion itself. Gold mining funds have a place in the equity portion of a portfolio but they would not have the defensive, safe haven and wealth preservation qualities of gold bullion.

UK citizens can as of April 2006 invest in gold bullion through their self-invested personal pensions. Gold bullion is allowed in a pension fund providing it is investment-grade gold which is gold of a purity of not less than 995 thousandths or 99.5 per cent pure and it must be immoveable and stored with a secure and regulated third party. It cannot be taken possession of and used as a "pride in possession" article.

Although HMRC now allows gold bullion within UK pension funds, it may not be possible to hold gold within all forms of self-invested personal pensions. The problem arises from the way in which insurance companies are supervised and regulated, specifically, the European Communities (Life Assurance) Framework Regulations 1994. However, this does not apply if the Sipp is structured as a trust.

IFAs and wealth managers are more than ever aware of the merits of asset diversification. However, understandably the benign experience of recent years lulled many into a false sense of security. There developed a widespread belief that we had arrived in a new economic paradigm. Some believed in Gordon Brown’s fairytale economic world of perpetual growth of "no more booms and busts". Unfortunately, the dragons of inflation and systemic risk had not been banished to beyond the realm as Prime Minister Brown would have had us believe.

Of all people, IFAs should always remember that "past performance is no guarantee of future returns" and that the low risk and incredible returns seen in most asset classes in recent years may not be repeated for another few years. The four most expensive words in the investment lexicon are "this time is different".

Gold’s non-correlation with the major asset classes means that it is becoming and will increasingly become an essential diversification in investment portfolios internationally. By using, for example, the Perth Mint Certificate Programme, investors can now invest in gold bullion in an extremely safe, tax-efficient and cost-effective way. Furthermore, unlike ETFs, IFAs can receive commissions for investments in gold bullion in the PMCP.

The wise old Wall Street adage to invest 10 per cent of one’s portfolio in gold and hope it does not work is more important now than at any time in living memory.

Mark O’Byrne is executive director of Gold and Silver Investments Limited