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By Mark Dampier, Head of Research, Hargreaves Lansdown

There is little that compares with gold in the imagination of mankind. Rare, durable and beautiful, it has been prized as a store of wealth and symbol of power for millennia.

The centre of demand is now India, where the vast population has a seemingly insatiable appetite for gold. Jewellery is often given as a gift on key dates in the Hindu calendar. In Bangalore alone, for instance, there are around two thousand gold shops but even they can struggle to keep up with demand during the spring festival of Akshaya Thrithiyai. Last year an enormous 70 tonnes of gold was sold in a single day. In fact demand appears to be accelerating; ahead of last year's Diwali festival Indian gold imports were more than double those of the year before. Private individuals in India together own more gold than the US government.

This surge in demand for gold can be attributed to the rise in India's prosperity. Their economy grew by 8% in 2006 (compared with 3% in the UK) and similar growth is forecast this year. Economic growth feeds through to a rise in disposable income and Indians appear to have become astute gold buyers – after all it is an investment as well as a gift. Given their recent surge in purchasing they clearly believe gold represents a good investment at current levels.

The value of gold is ultimately based on its considerable rarity. To put the scarcity of gold into perspective, consider that a mere 2,500 tonnes was mined during the whole of 2005 - barely enough to fill a typical two bedroom house.

Gold is also still desired by many governments, who continue to view it as protection against the vagaries of currency fluctuations. Developed economies have large gold reserves and many developing economies are catching up fast. For example, in the last seven years China has increased its gold reserves by over 50%. As these economies develop further the likelihood is they will look to grow their reserves, further boosting demand.

What does this mean to investors?

How might one benefit from this investment theme? The historical trend is for a 1% change in the price of gold bullion to trigger a 3% move in the value of shares in gold-related companies. There are no guarantees as gold shares have lagged over the last couple of years but if that trend reasserts itself then equity investors may benefit if share prices race to make up the lost ground.

Our favourite gold equity fund is BlackRock Merrill Lynch Gold & General. This specialised fund aims to achieve long term capital growth by investing in the shares of companies involved in gold and other precious metals. It launched in 1988 and has been managed by Graham Birch since 1999. He has over 20 years experience in analysing mining equities.

Graham Birch invests globally and has the freedom to invest in both developed and emerging markets. The fund is benchmarked against the FTSE Gold Mines Index which the manager has successfully out performed, although please remember that past performance is not a guide to future returns and its value can fall as well as rise.

As a specialist fund investors should expect returns to be volatile, especially when compared to the price of gold bullion. We believe it is an excellent way to benefit from any rise in the global demand for gold and other precious metals.

The BlackRock Merrill Lynch Gold & General Fund is available through Hargreaves Lansdown with an initial saving of 5%.
Investors can apply online with a debit card or download application forms or transfer forms from our website.

The Fund of the Month is written by Hargreaves Lansdown. An independent broker offering unit trust, stockbroking, pension and investment services.

Useful links:

• See details of Merrill Lynch Gold & Gen Inc


• More from Hargreaves Landsdown