Apart from the fact that gold is rallying, and actually so are soya bean, oil, stocks, bonds and anything else that trades, does it really protect you from a decline in the dollar, global instability or is it a good investment for that matter?

Fans of gold generally recommend it as a solution for one of two cases: they either believe it serves as a good hedge to a declining dollar, perhaps in inflationary times, or, given gold has done nothing over the last several decades on an inflation adjusted basis, think it’s a good long-term investment.

Then, you have a third case of the so-called gold bugs, who believe in an apocalyptic scenario where paper currency, as we know, would be in question. We squarely doubt gold’s use in any of the scenarios.

Also Read Rajeshree Varangaonkar and Bharat Indurkar’s earlier columns

If history means anything, it tells us that gold is neither a great hedge nor a great investment. Perhaps the biggest move in the dollar occurred in the 1980s. The dollar on a trade-weighted basis rallied almost 90% in the early 1980s and gave it all back in the mid-late 1980s. During the same period, gold, which should have mimicked the movement in the dollar reversed, found itself down around 30%.

In times of economic distress, money tends to flow to safe havens; that continues being the dollar, and contrary to popular belief, the dollar rallies in most global recessions. In the panic days of late 2008, when the US financial system was falling apart, gold, far from protecting holders of the metal, found itself down 25% in a matter of five months. Ironically, the US stock market was down only 15% during this time.

Contrary to being a low volatility safe play, gold then actually becomes a case for high volatility. Most commentators currently believe that funds chasing gold are in effect chasing a different reserve currency.

The gold rally, we believe, has less to do with the search for a reserve currency away from the dollar and more to do with every risky and riskless asset class under the sun rallying, and the desperate search for money managers to put money to work in something that has underperformed and may look cheap.

The yellow metal hasn’t proven to be a particularly good long-term investment either. Starting with the golden era for the US stock market in the early 1980s until after the tech bust—so that comparisons aren’t completely one-sided—stocks had grown to almost seven times their original value. Gold, meanwhile, had lost 25% of its value.

Gold has redeemed itself only once in its history—in the mid-1970s when the US was caught in an inflation spiral, until 1980 when inflation topped. Gold did return well in excess of the high annual inflation of that period, but promptly after 1980 entered a bear market which lasted at least 20 years. The only other meaningful rally in gold occurred during the last expansion and was purely liquidity driven. However, one would have been better off owning emerging market stocks rather than gold.

The gold bugs, however, own dental fillings in the expectation that the US fiscal and current account deficit will come home to roost at some point, and we will go back to the gold standard instead of paper currency. If the world did come to that we dread what would happen to asset prices in that doomsday scenario and holding a bit of gold isn’t exactly going to save anybody. Ironically though, the US is the largest owner of gold in the world.

To sum up, we believe not only will gold never give you the kind of returns other assets would in good times, but also it will not protect you adequately in bad times.

Gold is a commodity at the end of the day, and like any other commodity, its value should depend on supply and demand. Unfortunately, we rarely hear of demand, depleting reserves or mine shutdowns explaining the price action of gold. These discussions, which have taken a back seat, should really be at the fore, and gold prices should be more dependent on Zaveri Bazaar than the Chicago pits that trade the dollar.

Rajeshree Varangaonkar and Bharat Indurkar have day jobs with US-based hedge funds. They write every other Thursday. Send your comments to globalbeat@livemint.com