'A perfect storm' is making gold one of the hottest assets on the planet

"A perfect storm" in markets has left investors scrambling to add gold to their portfolios for protection, according to the World Gold Council.

Investors have another prime and relatively safe choice in the government bonds of developed markets, but that has been compromised by "unconventional monetary policy," the council said in its market update for August.

The yields on developed-market government bonds have trended lower as demand has risen.

Sovereign authorities like the European Central Bank are stoking this demand through their bond purchases, which are pushing down yields.

As bond prices rise, their yields fall. And this policy approach by central banks has left investors questioning its effectiveness as they scramble for better yield elsewhere, like in gold.

Gold prices have surged 27% this year, outperforming many other commodities and the S&P 500.

The council used the Bank of Japan's weak bond auction as an example of what it believes investors think of central banks.

On Tuesday, a Japanese 10-year bond auction drew the weakest demand in five months. That was after Japan announced a stimulus package worth over ¥28 trillion ($275 billion), but smaller than markets had expected.

The World Gold Council, which sponsors the SPDR Gold Trust, one of the largest exchange-traded funds in the world that is backed by gold, argued:

"Many analysts are interpreting weak Japanese Government Bond demand as a signal that investors are starting to lose confidence in the effectiveness of unconventional monetary policies, following increasingly desperate bids by the world's central banks to reflate the global economy. In this environment, we believe investors are using gold to hedge portfolio risk as they add more stocks."

The WGC said that as central banks add more bonds to their balance sheets, they are limiting the amount that's available to investors.

"In reality, we estimate that less than 40% of DM sovereign bonds (US$10 trillion) have a positive yield and are 'available' to investors, while only 17% (US$4.4 trillion) is yielding more than 1%," the council said.

"In our view, lower opportunity costs and a more limited set of investable assets has, in turn, notably increased the lure of gold."