World mass media state, that currently gold is again at the peak of popularity. It has outperformed all major stock markets this year in dollar terms. Today, the price of gold on the stock markets is approximately USD 2,525.70 per troy ounce (the price of 1 gram of gold in Ukraine is about UAH 3,314.01).
Wealthy people actively buy gold bars, which further increases the demand for it. The price of gold reached record highs in all major currencies, and the value of a standard bullion exceeded one million dollars for the first time.
Interestingly, gold has shown resistance to fluctuations in the US dollar and interest rates, which previously had a strong impact on its price. Prior to the covid pandemic, US real, i.e. inflation-adjusted, interest rates were a key driver of gold prices, but this is no longer the case.
Another interesting point is that while gold has reached record highs, other assets that are generally considered to be “high yielding gold” have not performed as well. For example, silver cannot break the barrier of $30 an ounce, and shares of gold miners lag behind the rise in the price of the metal itself.
What drives the gold market and what is the meaning of gold
Historically, gold retains its value for many centuries. It is not subject to inflation like paper money, and does not depend on the economic conditions of individual countries. Unlike stocks or bonds, the value of gold does not depend on financial markets. This makes it an attractive asset during economic crises or political instability.
Gold is a physical asset that can be stored and used as a medium of exchange. This makes it a reliable means of capital preservation in conditions of uncertainty. During economic crises or global events such as pandemics, the demand for gold increases, increasing its value. For example, during the COVID-19 pandemic, the price of gold reached an all-time high in August 2020, when it reached $2,072.5 per ounce.
However, gold is not as convenient as other forms of money and credit. That is why we no longer use it as our main currency. Money is a social technology that evolves over time.
But if your monetary system collapses, the properties of gold make it a valuable backup option. It doesn’t have to be the global financial system. It is important to understand that gold is not an “end of the world” asset.
Gold is often associated with apocalyptic scenarios, but not all countries have the stability that the US and UK consider the norm. For example, if you have to flee a country like Venezuela or experience hyperinflation, gold will help preserve some of your wealth, unlike the local currency.
Gold as a reserve currency or an asset for the paranoid
Gold can be considered a “reserve currency”. This growing market was launched by central banks. It is now dominated by exchange-traded funds and trend-following traders, but the first buyers were major players in the financial system.
Why is this important? If you look at the fall in gold after the Bretton Woods agreement after 1971, it happened when British Chancellor Gordon Brown decided to sell about half of the country’s gold reserves between 1999 and 2002. Brown has been criticized for this, but his decision makes more sense when viewed from a political perspective.
It was the time of the introduction of the euro. Approximately 40% of the proceeds from the sale of gold went to support the new currency. In other words, Great Britain exchanged its “reserve money” to support a new, radical monetary experiment.
The move reflects the West’s post-Cold War era of peak confidence. The economic problems seemed solved, we had reached the “end of history”, and although John Maynard Keynes’ quote about the “barbaric relic” applied to the gold standard, the metal itself was now considered an asset for the paranoid.
Since then, the world has become much more complicated in terms of geopolitics. Hopes that China and Russia would become US allies because of the advantages of free market capitalism over centrally planned communism have failed for many reasons.
There is currently a situation where the global dominance of the US dollar is being questioned by some participants. This is not so much because of the threat of the collapse of the dollar (although large public debts are also a concern), but because of the risk of being disconnected from the dollar system, as happened with Russia. Those who fear separation from the world currency system objectively need a large amount of “reserve money”.
Purchase of gold bars for investment portfolio insurance
The situation is unlikely to improve in the near future. That is why buying gold is a good option for insuring an investment portfolio that should be separated from other assets. Apparently, gold is a “forever” asset that should be part of every investor’s core asset allocation. It is worth rebalancing when you have too much or too little gold, while other assets are friends in case of bad weather.
If that sounds unconvincing to you, consider the fact that central banks own gold and always have, even when the market has bottomed. If these financial market regulators still see the precious metal as an integral part of the monetary system, perhaps private investors should adopt the same strategy.
Tatyana Morarash
