The recent financial crisis has eroded investor confidence in stock market activity and certain other investment options such as real estate. As such, investors are increasingly shifting to risk-free investments. In this scenario, gold has emerged as the most favorable option among both the institutional and individual investors. What are the unique characteristics of gold that have made it a relatively safe asset? Why has it become vital to include gold in one's portfolio today? This articles provides answers to these questions.

The year 2008 was a historic one by many standards. Almost all asset classes, such as, equities, commodities and real estate, across the world succumbed to the unprecedented magnitude of credit market crisis that originated in the US. The wealth destruction in all these asset classes was massive, which was further significantly magnified on the back of liquidity pressures across the markets. Of course, the only asset class that successfully withstood the financial tsunami was `Gold'. This was largely due to the inherent nature of gold as an asset class. In fact, gold is the only asset that enjoys unparallel characteristics such as consumption value and is inflation-proof.

Between 1870 and 1914, there was a global fixed exchange rate. Currencies were linked to gold, thus the value of a currency was fixed at a set exchange rate to gold ounces. This was known as the gold standard. However, the gold standard was abandoned with the onset of World War I.

At the end of World War II, the conference at Bretton Woods made efforts to improve global financial stability and increase global trade. It established the basic rules and regulations governing international trade. It was agreed that currencies would be fixed, or pegged, to the US dollar, which, in turn, would be pegged to gold. What this meant was that the value of a currency was directly linked with the value of the US dollar and indirectly to the value of gold. Thus, countries which possessed higher gold reserves started to enjoy a bigger say in matters of the global economy; and gold began to take the center stage of the financial world. However, gradually over a period of time, different countries started to have their own specific economy related issues, and this necessitated them to take decisions based on the demands of their respective economies. Hence, currencies are no longer linked to the gold reserves; and their values are determined based on the demand and supply forces for the respective currencies. Even though this brought an end to the `Gold Standard', as defined by "Bretton Woods" Agreement, gold is still continuing to enjoy its dominant role in the financial world, thanks to its rare characteristics.

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