From Crisis to Confidence: How Gold Emerges as a Safe Haven
- Share.Market
- 7 min read
- 10 May 2024
In the world of money going up and down, gold is like that always-there friend, never losing its sparkle. It’s not just shiny stuff; it’s like your reliable buddy, guiding you through money worries, giving hope when things seem tough. Let’s find out why gold stays strong and safe, even when everything else feels uncertain.
Why is Gold known as Safe Haven?
First-Order Insight: Economic Stability
In times of turmoil, gold stands strong, its value resilient, while other assets buckle under pressure. Beyond mere glitter, it embodies a sanctuary for investors, a haven in the tempest of uncertainty. During Russia-Ukraine war, on February 24, 2022, the gold price in India reached the level of Rs 51,500 (24 carat per 10 grams), but on February 23, 2022, the gold price was at Rs 50,180 (24 carat per 10 grams), there was sudden increase in gold price due to start of war and Indian’s Volatility surged by 30% and stock market tumbled by 3%.
Second-Order Insight: Inflation Immunity
But wait, there’s more to this golden tale. As inflation rears its head, eroding the purchasing power of currencies, gold emerges as a shield, preserving wealth with steadfast resolve. It’s not just an asset; it’s a timeless hedge against the erosive forces of economic instability. In 1974 and 2008, there were eight years when the US experienced a high inflation environment, during that time gold surged by 14.9% on average year on year.
Diversification Benefits: Gold offers diversification benefits to investment portfolios due to its low correlation with traditional assets such as stocks and bonds. When the value of these assets fluctuates, gold often moves in the opposite direction, providing a balancing effect that can help reduce overall portfolio risk.
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Correlation of GOLD with other Asset Classes:
LBMA Gold PM | BBG Global Tsy ex US | BBG US Bond Agg | BBG Commodities | MSCI EM | MSCI DM ex US | MSCI US | US Cash | |
LBMA Gold PM | 1 | |||||||
BBG Global Tsy ex US | 0.577 | 1 | ||||||
BBG US Bond Agg | 0.403 | 0.784 | 1 | |||||
BBG Commodities | 0.362 | 0.166 | 0.04 | 1 | ||||
MSCI EM | 0.355 | 0.43 | 0.256 | 0.466 | 1 | |||
MSCI DM ex US | 0.355 | 0.496 | 0.311 | 0.463 | 0.893 | 1 | ||
MSCI US | 0.243 | 0.383 | 0.274 | 0.392 | 0.673 | 0.8 | 1 | |
US Cash | 0.111 | 0.116 | 0.091 | -0.102 | -0.017 | -0.026 | -0.022 | 1 |
(Source: World Gold Council)
Crisis Resilience: Gold shines in turbulent times, proven during past recessions like 2008 and the COVID-19 pandemic. Its stability makes it a trusted refuge for investors when uncertainty hits.
Global Demand: More than an investment, gold is a must-have in industries like electronics and jewellery. Its enduring popularity across sectors cements its status as a vital asset in today’s world.
Gold Price Analysis: A Comparative View
In India, gold prices (24 karat per 10 grams) surged from Rs. 63.25 in 1964 to Rs. 73,125 by April 2024, with a notable Rs. 10,000 increase in 2023, reflecting a 6.5% gain. Global prices in US dollars saw fluctuations from an average of $1,266 per ounce in 2014 to $2,063 per ounce in 2023. Over 1990-2020, gold prices rose by around 360%. These fluctuations were influenced by diverse economic and geopolitical factors, showcasing the volatile nature of gold markets.
How Did Gold Perform During Economic Uncertainties?
Ukraine – Russia War:
In the early months of 2022, gold prices had a sluggish start due to expectations of interest rate hikes, strengthened US real yields, and the strong performance of the US dollar. However, it changed with war between Russia and Ukraine, as these geopolitical uncertainties covered previous market drivers.
The price of gold got pushed above $2,000 per ounce after the Russia-Ukraine conflict helped it rise by six percent during the first quarter of 2022. The invasion of Ukraine by Russia triggered a rise in commodity prices, including oil, gas, and wheat, fueling inflation expectations and thereby strong gold prices further. Moreover, gold has been a safe haven asset, displaying a newfound positive correlation with US equity market volatility and the US dollar around global uncertainties.
When Russia invaded Ukraine, spot gold soared to its highest level in over a year, hitting $1,968.01 per ounce – a remarkable 3.17% increase – as investors rushed to safe-haven assets. The day following the invasion, spot gold saw a decline, trading at $1,897.76 per troy ounce. This represented a slight decrease of 0.5% compared to the previous day.
Israel – Hamas War:
The escalation of conflict between Israel and Palestine saw a 1% increase in the spot gold price (XAU), settling at $1,847.47 per ounce, as investors chose flight to safety due to the stability of gold during geopolitical turmoil. Following the war, gold prices continued to climb, reaching a more than one-week high in the international market in October, 2023 due to heightened market uncertainty stemming from the West Asia conflict as there is supply chain disruption of oil. Gold rose by 0.2% to $1,864.39 per ounce, marking its highest level since September 29, 2023.
Israel – Iran’s War:
On April 15, 2024, spot gold saw a 0.3% increase, reaching $2,349 per ounce. This followed its record-setting high of $2,431 per ounce on April 12, 2024, driven by concerns over a potential attack by Iran on Israel. In this year, bullion has surged nearly 14%. Similarly, US gold futures traded down 0.3% as of April 15, 2024, but remained up 14% for the year.
Central Banks Pilling up Gold Reserves
Demand for gold has risen by 28% this year, primarily driven by a flight towards safer assets due to soaring inflation and geopolitical tensions. This trend is underscored by central banks globally, which have been accumulating gold reserves at a pace not witnessed since 1967. In January 2024 alone, central banks reported a significant increase in global official gold reserves by 39 tonnes. These actions reflect a response to the prevailing economic challenges, where the global economy grapples with persistent and widespread inflation pressures and current geopolitical tensions.
In December 2023, the People’s Bank of China (PBoC) announced a 30-ton gold purchase, the second consecutive monthly increase after three years of silence, bringing its total gold reserves to 2,011 tons, a 62-ton increase for the year. By the first quarter of 2024, China’s gold reserves rose to 2,264.87 tonnes from 2,235.39 tonnes in the previous quarter. In 2023, China led all central banks by adding 225 tons of gold to its reserves, the highest increase since 1977, reaching a total of 2,235 tons by December.
Country | Region | Economic grouping | FX Reserves | Total Reserves | Gold Reserves Tonnes | Gold Reserves Millions | Holdings % |
---|---|---|---|---|---|---|---|
China | East Asia | Upper middle income | 3301320 | 3450694.61 | 2235.39 | 149374.61 | 4.33 |
Japan | East Asia | High income | 1238541.06 | 1295071.22 | 845.97 | 56530.15 | 4.37 |
Switzerland | Western Europe | High income | 755903.85 | 818447.75 | 1040 | 62543.91 | 7.64 |
India | South Asia | Lower middle income | 574872 | 628569.34 | 803.58 | 53697.34 | 8.5 |
Taiwan, China | East Asia | High income | 564009 | 589485.21 | 423.63 | 25476.21 | 4.32 |
Russian Federation | Central and Eastern Europe | Upper middle income | 442537.06 | 598417.06 | 2332.74 | 155880 | 26.05 |
According to reports, central banks are rapidly accumulating gold reserves not only as a hedge against geopolitical tensions and inflation but also as part of the broader de-dollarization movement. This trend, unseen since 1967 when the US dollar was backed by gold, indicates a global effort to reduce reliance on the US dollar in trade and investment.
How much have Central Bank increased the holding of gold in 2024:
Central Bank | Change (Tonnes, Feb 2024) | Total (tonnes) |
People’s Bank of China | 12 | 2257 |
National Bank of Kazakhstan | 6 | 306 |
Reserve Bank of India | 6 | 817 |
Central Bank of Turkey | 4 | 556 |
Monetary Authority of Singapore | 2 | 232 |
Czech National Bank | 2 | 34 |
Qatar Central Bank | 2 | 103 |
National Bank of the Kyrgyz Republic | 1 | 24 |
Conclusion
Recent conflicts, such as those between Russia and Ukraine, Israel and Hamas, and the potential for conflict between Israel and Iran, have only reinforced gold’s role as a reliable refuge for investors. With central banks worldwide increasing their gold reserves at an unprecedented rate, gold remains the ultimate choice for those seeking safety amidst uncertainty.