PERHAPS the biggest irony of the past decade has been the fact that despite all the new financial products – ETFs, CDOs, CDSs and so on – the best return was earned by the oldest asset of all – gold. At the start of 2000, the yellow metal traded at around $300 per ounce. By the end of 2009 it rose to $1,100 – a 266 per cent increase. As most equity markets around the world lost money, gold’s performance is a testament to its durability as an investment idea.

However, gold’s massive rally has sparked a strong debate among investment professionals. Bears argue that it is the next bubble to burst, while bulls claim that its true ascent hasn’t even started yet.

For now the bulls are correct. Contrary to popular perception, gold is not a hedge against inflation but rather an insurance policy against runaway fiscal deficits. Gold is essentially a no confidence vote in fiat currencies. It is no coincidence that gold’s ascent in the past decade paralleled the unprecedented expansion of the US budget deficit during the past decade. With nearly $2 trillion of US debts due for re-financing this year, the fundamentals for further gold appreciation are firmly in place.

Yet it has not been easy to make money from gold. The last decade saw some stomach-churning corrections. During its multi-year uptrend, gold would often lose up to 80 per cent of any gains made during a rally before once again moving higher. Such price action is emblematic of a classic bull market that constantly tries to shake out the weak longs from its positions. Unless gold drops below $850 – its last major breakout point – it remains a buy.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read their daily commentary on currencies at www.GFTUK.com/commentary or e-mail your questions to them at BorisandKathy@gftuk.com.