It's a little known fact of the revolutionary wars that the French succeeded in invading Britain - three French frigates landed 1,400 men in the small fishing village of Fishguard, southwest Wales. Hundreds of miles from London, the bizarre location of this invasion caught the British government and army off guard.

Fortunately, however, the villagers of Fishguard had no intention of being overrun by the French. They armed themselves with pitchforks and fish hooks and set to with the French, forcing their surrender (and thereby confirming many British stereotypes of the fighting prowess of the French). But the news of the invasion spread across the rest of the country much faster than news of victory and it provoked widespread panic. Britain had been anticipating a French invasion for years and, without access to 24 hour news, many people assumed that Fishguard was the vanguard of a wider campaign.

The first thing these people did when they heard the news was not rush out to buy weapons or food. Instead they hurried to their bank and demanded all their wealth in gold. It appears that the French had been deliberately trying to incite a workers' revolution in Britain by creating a panic. As it turned out, the invasion of Fishguard - the last invasion of Britain by a foreign power - failed. But the gold rush it sparked did succeed in bringing the Bank of England to its knees and nearly bankrupted the country.

The instinct to flee to the financial security of gold is as strong today as it was in the 18th Century. Investors plunged into gold after the September 11th attacks for the same reason the citizens of Britain did after Fishguard: gold is a safe bet when the world seems to be falling apart.

Gold is rare and cannot (easily) be faked so it retains its value even though banking systems and paper money are crashing. It can be taken anywhere, traded with anyone and does not rely on computers to make it work. Governments cannot seize gold like it can a bank account and if a foreign power decides your country is harbouring weapons of mass destruction it is relatively easy to hide your wealth from the invading hordes.

War, terrorist attacks, oil price shocks, geopolitical uncertainty, banking collapses and stock market jitters are all events that will push the price of gold up as people rush to protect their wealth. Gold is therefore the ultimate hedge - a 'rainy day' fund that gains in value when everything else is losing it.

Investors who bought gold on 10 September 2001 would have seen their investment rise from about $275 an ounce to $290 in just a couple of weeks. During 2002 the gold price rose from about $280 an ounce to $380 as the US geared up for an attack on Iraq - and to prove the countercyclical nature of gold, this was a time when the equity markets were performing poorly.

Buying gold
For centuries the only way to invest in gold was to buy a bar or coins from your local goldsmith and hide them in a bank vault or under your mattress. Physical gold can still be bought, especially in the Middle East and Asia, where it is still an important trading commodity. But in the West demand is limited as many investors are put off by the high cost of storage and insurance. Instead, punters are turning to 'virtual' trading as a means of getting exposure to the gold markets.

The largest gold exchange in the world is COMEX, part of the New York Mercantile Exchange (NYMEX). This is where the gold miners and bullion banks trade gold futures - we're talking about the serious end of the business and the high cost of doing business on NYMEX limits it to large organisations.

The minimum trade on NYMEX is 100 ounces ($43,000 at current gold prices) and the futures contracts can only be bought through registered brokers, who will obviously charge a healthy commission.

Katherine Pulvermacher, head of asset allocation at the World Gold Council, admits: 'Investing on NYMEX is effectively restricted because of the high cost and that is an issue we have been dealing with, but there are other means of trading gold.'

There are a number of equity funds listed in Canada, New York and London that focus on mining companies but they can be volatile and their performance will not necessarily follow the gold price.

Probably the best way to punt on the gold price, therefore, is to go spread betting. Stuart Wheeler invented this form of gambling in 1974 as a means of betting on the gold price. The company he founded was even called Investor's Gold - now IG Index.

There are numerous spread betting firms in the UK and also Australia, and the wide range of bets they offer has made them very popular: it is possible to gamble on FTSE movements, the oil price, sport and, of course, gold.

Will Armitage, senior quoting dealer at IG Index, said: 'Spread betting is a popular way of investing in gold because you don't have to buy the real stuff and then worry about how to store it. And you don't have to pay any expensive fees to a trading bank.'

How it works
Spread betting is essentially a higher or lower bet. The spread betting company will offer a price it thinks gold, for example, will reach at some point in the future - this is usually based on actual derivative trading.

It is up to the punter to decide if the index will go higher or lower than that figure. A stake is then put on each point of movement up or down.

Take this example: the current gold price is around $430. Gold is always quoted in US dollars per ounce, while the price is set in London every day at an event (reassuringly) called the Fix. The spread betting company is offering $400 by the end of December. The investor decides it will actually drop a lot further and puts a £100 stake on each point.

If at the end of December the gold price is $390 the investor walks away with $1,000 (10 points at £100 each). If gold ends up at $410, the investor loses $1,000.

IG Index took a bet in October this year from a client who put $15,000 per point on the gold price rising above $400. So, if America invades Iran (or somewhere similar) and the gold price rises $100 an ounce, this punter would gain a cool $1.5 million.

'People like investing in gold for an emotional reason,' said Armitage. 'It's got a lustre. For thousands of years we have been trading gold and there is a certain romance about it. It is also a market that is a bit of an unknown and investors like that.' Spread betting firms offer other means of gambling on gold including binary betting, which is a simple punt on whether the price will finish higher or lower on a particular day, and contracts for difference (CFDs). Check out the websites to the right for more details.

Predicting the gold price
Tracking the gold price is easy as it's quoted in all major newspapers, but the best way to guess where the price may go in the future is to keep reading the paper - especially the foreign news.

Any major geopolitical trouble in the Middle East, Pakistan, India, Asia or Japan will almost certainly lead to an increase in the gold price. It may seem morbid gambling on a bloody coup in Saudi Arabia, or India and Pakistan going to war, but these are the events that move the gold price.

Punters should keep an eye on the trades being conducted on NYMEX too. These can be seen on the exchange's website and indicate whether the professionals are going long or short - i.e. whether they think the price is going up or down.

It's also worth bearing in mind that the gold price is usually doing the opposite to the US dollar. A weak dollar usually means a high gold price and vice versa.

The other things punters should keep an eye on are reports of a bad monsoon or typhoon in India. It may seem excessive basing a bet on farming reports from India, but the Indians consume more gold than anybody else in the world - nearly a third of all production. When there is a good harvest in India farmers buy gold from one of the three million village goldsmiths in the country and save it until a bad harvest forces them to sell. There are hundreds of millions of these farmers and their actions can heavily influence gold demand in any particular year.

But finally, a warning. For thousands of years mankind has been obsessed with gold. Perhaps it is the unique colour or its absurd value, but there is something in gold that makes us go slightly nuts.

The history of gold is littered with kings, adventurers and warriors who set out to find a golden fortune - and a remarkable number of them came to unpleasant ends.