George Soros, the fund manager who made over $1bn betting against the pound in 1992, has called gold ''the ultimate bubble'', writes Michael Rankin.

Precious metals are seldom out of the news. From updates on the latest price movements to yet another daytime TV advert or internet pop up, offering cash for gold.

Gold and silver have been used as a store of value for thousands of years. Until 1971 the value of the US dollar was linked to gold, whilst in the UK silver coins contained real silver until 1947.

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The question is can money not based on a hard asset endure in the long term? History suggests not. Since 1971, when the dollar's link to gold was broken, its value has fallen significantly. Due to inflation, a 1971 dollar is equivalent to $5.51 today. History is full of examples of inflation resulting from issuing money not based on physical assets. These range from Roman times to Weimar Germany, when people eventually resorted to barter, rather than transporting wheelbarrows filled with money.

This doesn't necessarily mean precious metals are a good buy. Just as the value of paper money is based on people's willingness to accept it, the value of precious metals is based on belief. This can result in substantial price volatility, as investors' views change. Following the relatively high inflation of the 1970s, gold and silver both experienced new all time highs. Gold reached a high of $850/oz in 1980, whilst silver hit a record high of 48.70/oz in 1979.

These were to prove lasting peaks. Gold went on to fall to a low of $260/oz in 1999, with silver falling to $3.60/oz in 1990. Holding silver from peak to trough would have resulted in a loss of almost 92 per cent.

So what's the outlook for the future? Gold and silver have staged impressive rallies since their lows, with gold now trading at around $1765/oz and silver at close to $33.70/oz. Take into account the fact that the dollar, or pound, now buys less than it did in the past, the real rise is even more substantial. With this level of volatility, gold and silver are clearly not without their risks.

With the launch of the UK's index-linked debt markets in the early 1980s, investors are now able to protect their purchasing power, with substantially less volatility. However, as recent events in Europe are showing, unfortunately governments do not always pay back their debts. Worse still, is the fact that governments can often inflate their currency, in order to reduce the real value of the money they need to repay.

With perfect timing, gold and silver can be good investments, generating substantial inflation linked returns, not dependent on the good faith of any government. However, if timed badly, large losses can result. Another way to secure exposure to precious metal prices, and positive returns not linked to the goodwill of governments, is often to invest in companies that produce gold and silver. With many producers having production costs significantly below the current gold price, a further rise in the price of gold can be very beneficial. With high margins and healthy balance sheets, producers can generate returns for shareholders even if precious metal prices fall.

Michael Rankin is a Chartered Fellow of the Chartered Institute for Securities & Investment and an Divisional Director in the Teesside office of Brewin Dolphin, and can be contacted on 01642 608855.

Past performance is not a guide to future performance. The value of investments can fall and you may get back less than you invested. No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.

The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents.