Admittedly, gold is a peculiar asset class. It does not offer any returns in form of dividends or interest income. Nor is it a commodity consumed by businesses, like industrial metals or fossil fuels. It is just there, for millennia coveted for its non-corroding shine and its rarity.
Gold enthusiasts emphasise its non-inflationary properties, allegedly protecting against ‘currency debasement’, inflation, and market slumps. On closer inspection, this does not hold. Yes, at times, gold seems to have an inverse relationship to the dollar value, to interest rates, and recessions, offering the promise of safety. But often it doesn’t, as we can see now. While Trump’s war is threatening to suffocate the world economy, gold has dropped from an all-time high in January of $5,600 to $4,500 now – a 20% drop at the time of writing.
Many of gold’s protective properties materialise only over periods long enough to be meaningless for most investors. A treasure trove of Roman gold coins dug up in the 21st century is still a valuable find. Wads of ancient bank notes hidden behind 19th-century wainscoting is not.
I bought some gold over 20 years ago at $275 an ounce. Gold’s spectacular drop triggered by Trump’s aimless war in the Middle East may contradict gold’s alleged safe-haven status, but not its significance in my retail portfolio. Technically, as we drift into yet another supply disruption severe enough to stifle growth and rekindle inflation, gold’s volatility and downward trajectory looks more like a risky AI investment than a remedy against another epic oil shock reminiscent of the 1970s, galloping inflation and shares and bonds tanking. In fact, gold’s recent fall mimics Nasdaq, America’s IT stock market, to perfection.
Financial commentators like John Authers of Bloomberg see gold’s safe-haven status “failing its biggest test. Gold isn’t much of a haven. It is almost exactly the opposite.”
I think this needs some clarifications. Gold is certainly not a mechanical hedge against volatility, bond market upheavals or a stock market crash in the same fashion as options, futures contracts or short selling. And it is not a growth-orientated strategy like investing, for instance, in a profitable chip maker like Nvidia.
Admittedly, many retail investors, surprised by the meteoric rise of gold since 2020, have tried to buy into the momentum, with money pouring into gold ETFs. But it is worth remembering that gold’s recent, phenomenal rise started with worries about a sudden return of inflation – after decades of hibernation. It was triggered by the supply shock of the lockdowns in combination with generous fiscal support of households splashing it out with abandon while incarcerated at home.
This was followed by Russia’s raid on Ukraine and the ensuing gas and oil deficit in 2022, triggered by sanctions and Putin’s energy blackmail of Europe. Fears for growth and about continuing inflationary pressures were amplified by Trump’s tariff wars, his reckless deficit spending (Big Beautiful Bill) and rising fiscal expenditure for defence. His attempts to force the Fed to monetise his unabashed spending played a role too. A central bank obedient to the spending wishes of government ceases to be a guarantor of price stability. Debasement of the dollar was a justified fear.
There was an even bigger impact on central banks all over the world. Sobered by America’s over-use of sanctions and the aggressive weaponisation of dollar-based payment systems (followed obediently by Europe), many countries understood that what had happened to Russia may as well happen to them: the seizure of deposits and a ban on money transfers.
Trade in local currencies was a possible, albeit limited, bypass. Yet the building-up of liquid, versatile reserves outside the dollar-anchored banking system had become a necessity. China, Russia and many others saw gold as the ultimate guarantor to remain liquid in conflict situations. Gold was their solution.
For retail investors, gold is a cushion addressing atavistic fears, worries about the stability and orderliness of the world around us. When payment systems seize up, when cyberspace becomes a war zone, when power failures and internet shutdowns cripple the ledgers of banks, their buildings collapsing in bombing raids, gold coins and platelets in a stash near you can still buy you an omelette.
In this respect it is not an investment. It is the ultimate life vest, also for countries. And it matters where your rainy day gold is stored. To keep it at the Fed of New York or locked away in Ford Knox may not be the safest place in another conflict with Trump.
Momentum buyers may have been waiting for a reason to sell, safely realising their quick and outsized gains over the last couple of years. Above the mesmerising prize of $5,000 (coinciding with Nasdaq’s 5,000 points milestone) any sell signal would be good. Jewellers had stopped buying already. They were running out of customers.
But I would argue that the main impulse was given by others. The unexpected, thoughtless attack on Iran had wrongfooted many professional investors. Rising interest rates, a rising dollar, a violently different outlook on the economy clocked up losses. Short positions had to be closed, margin loans covered, leverage reduced.
Yet the war, without an end in sight, had also put many countries in a precarious situation.
Fuel had to be rationed, EM currencies started to tumble, making imports more expensive. Factories in Asia and Africa dependent on Middle East feedstock had to pause, farmers had to forgo fertilisers. Every household suddenly faced dramatically higher nutrition and mobility costs and needed support. For Covid-depleted treasuries to sell some gold in times of need was a no-brainer.
What better way to cover unexpected shortfalls in investment portfolios and sovereign budgets than with idling gold reserves, waiting for a rainy day? This is a rainy day, after all, and reserves are built for moments like this.
Poland proposes to reduce its gold reserves to bolster defence spending. Italy wants to transfer gold gains from the central bank to the treasury. Turkey already sold 60 tonnes of gold in March to support the Turkish Lira.
Russia, the sanction buster and hence ultimate hoarder of gold, saw its central bank sell 9.3 tonnes in March, and Russia’s National Wealth Fund, which had already sold 200 tonnes of gold since the war started in 2022, only hesitatingly replenishing its war chest with gold supplied by local miners. Even after a drop of 20% the price is still good enough to cover emergencies. I think, the sell-off of gold will continue. But not for ever.
Andreas Weitzer is an independent journalist based in Malta.
This column’s purpose is to broaden readers’ general financial knowledge and should not be interpreted as presenting advice on investments or on the buying and selling of financial products.