The Midas Touch

Gold's status as an investment tool has persisted since ancient times, and it is still seen as a haven and a store of wealth by many. In this article, we'll examine the historical evidence that links market instability with gold prices and discuss the factors that make gold so appealing during times of turmoil.

What Gold Is Like By Nature
Gold's inherent properties make it appealing to investors during times of unpredictability. Its capacity to store value is predicated on its scarcity and the fact that it cannot be printed or devalued like fiat currency. Gold is a perfect medium of exchange due to its physical qualities, such as its durability and divisibility. Gold's inherent qualities have long been appreciated by investors and central banks, who use it as a protection against currency devaluation and inflation.

How Gold Has Fared Historically in Times of Uncertainty
The allure of gold as an investment can be better understood by looking at its past performance in times of market volatility.

- In the 1970s, as a result of the oil crisis, inflation, and the breakdown of the Bretton Woods system, gold prices skyrocketed. Gold prices soared by 2,329% between 1970 and 1980, from $35 per ounce to $850 per ounce.

- As investors sought shelter during the global financial disaster of 2008, gold prices progressively rose from $833/oz in 2007 to a peak of $1,895/oz in 2011. This implies a growth of 127% in just four years.

- During the early phases of the 2020 pandemic, caused by the COVID-19 virus, gold prices increased by almost 33%, from roughly $1,500/oz in January to a record high of over $2,000/oz in August.

These examples highlight gold's resilience in the face of economic and geopolitical unpredictability, as evidenced by its capacity to hold or even increase in value.

Equities Have a Negative Correlation
Gold's negative correlation with equities is a major reason why it is so appealing in volatile markets. Gold prices tend to climb when stock markets are unstable. Investors seeking to diversify their portfolios and buffer against probable losses in the stock market will find this inverse link particularly tempting.

In contrast to the 38% decline in the S&P 500 index, gold prices increased by 5.5% during the 2008 financial crisis. The fact that gold and stock market volatility have a negative correlation further adds to the precious metal's attraction.

The Need for Gold Among Central Banks
Gold's status as a reserve asset for central banks around the world bolsters its appeal as a refuge investment. About 34,700 tonnes of gold will be held by central banks in 2021, according to the World Gold Council. It is common practice for central banks to enhance their gold reserves during times of economic turmoil. The price of gold has risen thanks to the increased demand.

Affluence of Gold
Gold's great liquidity is one of the main reasons why it is so popular in times of unpredictability. Physical gold, gold exchange-traded funds (ETFs), and gold mining equities are all readily available for purchase, sale, and trade. Investors can swiftly and easily change their gold into cash or other assets, giving them the financial flexibility they need in times of economic turbulence.

A World Currency Based on Gold
Gold's status as a universal medium of exchange increases the metal's allure in times of unpredictability. Gold's value is not at risk from economic policy shifts or geopolitical unrest in the same way that national currencies are. When diversifying their holdings and seeking shelter from market volatility, investors benefit from this quality.

Investment Portfolio Risk Analysis
Gold's inclusion in a portfolio can serve as a kind of risk management, especially in times of volatility. Gold's negative correlation with equities means it can be used to cushion the blow of a stock market crash, as we've explored before. Investors' purchasing power is safeguarded by gold because of its positive association with inflation.

Low Expense of Carrying
Gold's carrying cost is minimal compared to those of other physical assets. Gold's carrying costs are low, especially when compared to other physical assets like real estate, which may need maintenance, insurance, and taxes. Because of its low transaction costs, gold is a popular choice among investors who want to protect their capital against inflation.

Psychological Appeal
It's impossible to understate gold's allure as a haven of stability in times of unpredictability. Gold's reputation as a safe haven investment is rooted in the metal's long history of serving as both a currency and a status symbol. Gold's perceived stability and physical character make it an appealing alternative to riskier investments during market downturns.

Prospects for Gold in the Future
Gold's potential as a store of value and hedge against uncertainty remains high as the global economy continues to face unprecedented challenges. Rising geopolitical tensions, the popularity of digital currencies, and the prospect of additional market volatility all point to the need for a diversified portfolio that includes gold.

Gold prices dropped last week from their April highs in response to comments made by the US Federal Reserve, who argued that the US central bank should continue raising interest rates in order to combat America's ongoing inflation. Recent price increases reflect both increased demand from central banks, which has been rising steadily since 2010, and continued strong demand from the jewelry, coin, and ingot sectors, which account for roughly three-quarters of total physical demand for gold worldwide.

The World Gold Council estimates that by the end of March 2023, central banks will have purchased 140 metric tons of gold. China has more over 2,000 tons of deposits, making it the world's greatest producer of the precious metal, and has added another 58 tons since the beginning of 2023. As it moves away from assets denominated in U.S. dollars, these are the first rises since 2019.

Gold is a desirable asset for investors during times of uncertainty because of its inherent qualities, track record during volatile periods, negative correlation with stocks, and demand from central banks. Gold's timelessness as a haven in times of uncertainty holds true whether it's used as a hedge against inflation, a store of value, or a portfolio diversifier.

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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Maiden Capital. The information provided is meant as a general guide only and should not be construed as investment advice. You should always consult your financial, legal and tax advisers regarding private equity and real estate investments