West faces considerable political and social unrest, says HAMISH MCRAE

Gold has traditionally been the ultimate funk investment, the asset you buy when you are really scared.

So was its record high, pushing through $2,325 an ounce on Friday, a sign that investors expect more economic trouble ahead?

Or simply a knee-jerk reaction to rising political tensions in the Middle East? Or maybe it was being wafted up by the surge in US share prices, with the S&P 500 close to its all-time high, and was not signalling a warning at all?

It’s complicated. Gold has certainly been some sort of hedge against inflation, and in volatile parts of the world a safe store of value. That is why the main central banks keep a large chunk of their reserves in the metal.

The US has the biggest stock of all, more than 8,133 tonnes of the stuff according to the World Gold Council’s tally at the end of last year. Next comes Germany with 3,353 tonnes, followed by Italy with 2,452 tonnes, France 2,437 tonnes, Russia 2,333 tonnes and China with 2,235 tonnes.

The UK, thanks in part to Gordon Brown’s 1999 decision to sell half our holdings, has only 310 tonnes. Given that the average gold price was only $280 an ounce in 2000, not very bright.

But while gold has given some protection against inflation, as an investment it has two huge flaws.

One is that it produces no income. The other is that it has been very volatile, at least since the peg from 1933 to 1970 of close to $35 an ounce was lifted.

It shot up to over $600 an ounce in 1980, before falling back to below $300 in the early 2000s. Then it hit $1,825 in 2011, before retreating to $1,065 in 2015, only to clamber back to the current record levels.

While there is a decent argument that everyone with a bit of spare cash should own some gold, the traditional limit would be to have no more than 10 per cent of one’s assets in it.

What that volatility does tell us, however, is that movements in the gold price are a good indicator of fear, not just about inflation, but also about the ability of society to hold together.

If you think back to the 1970s, when the retail-price index rose above 25 per cent, there was a real concern on both sides of the Atlantic that we faced hyperinflation, and a lot of people could remember what had happened in the 1920s and 1930s as a consequence. So the gold price took off.

Then, after Paul Volcker, chairman of the US Federal Reserve, lifted the Fed funds rate to 20 per cent in June 1981, it became clear the US would pull itself together and a new stability would result. So fleeing to gold was no longer necessary. A similar sense of crisis occurred after the banking crash of 2008. It looked as though Europe would lose the euro, until in 2012 Mario Draghi, president of the European Central Bank, uttered the famous words that the ECB would do ‘whatever it takes’ to save the currency.

Gold fell back again. Since then, we have had another scare, with inflation at its highest since the 1970s and 1980s, an experience that most working people across the developed world had not experienced. And not only the general workforce. Most professional investors have had no experience either. The average age of a fund manager is around 45. When they started work 20 years ago, inflation seemed truly beaten – and that was wrong.

So see the explanation for gold’s recent surge as having three parts, linked by fear.

People are frightened that the current bull market has gone a bit too far, and that it might be wise to diversify a little.

Two, they are worried there may be a second bout of inflation, just as there was in the 1980s.

And three, it is not yet clear how well western societies will hold together in the face of considerable social and economic unrest.

I am confident about this last point, but the gold market is saying that many aren’t.