This price remains at an all-time high even when it is scaled for inflation. Now, speaking about inflation, gold has been long regarded as the world’s safe haven metal helping investors during times of inflation. It particularly reveals its true potential when it is part of an asset portfolio.
Well, Terence Hove, Exness Financial Markets Strategist Consultant, notes, “Gold’s role as a safe haven is growing stronger as traders look for stable assets amid inflation and shifting global policies. With continued market volatility, gold remains essential to a diversified portfolio.”
Dependable store of value
It is no secret that the yellow metal is physically alluring, but so are other metals and assets. Now, the real reason that gold has withstood the test of time is its physical stability. Well, unlike other metals, gold does not corrode.
In its pure form, it does not react with oxygen or any other substance, making it resistant to rusting or tarnishing. Also, unlike other precious items like artwork, gold is virtually indestructible. Today, the stability of gold has translated into the investment sector. The good thing about it is that its price usually holds up even when the other assets (equities, bonds and real estate) are plunging. It is because of this reason that most investors prefer it when they are making an asset portfolio.
Now, you’ll be surprised that it's not only investors that are fans of gold investments. In fact, central banks all over the world are major buyers of gold, which they use as a store of value and make their reserves more diversified. According to the World Gold Council, central banks around the world continued to lead in the demand for gold in 2024.
According to Ales Michl, the chief of the Czech Republic’s central bank, they need to reduce volatility, and that’s why they were taking in gold, an asset with zero correlation to stocks. In the same beat, Adam Glapinski, governor for Poland’s central bank, said that gold and hard currency reserves are vital in protecting the economy against catastrophic events.
Protection against inflation
One of the most appealing elements of gold is its ability to hedge against inflation over a long period. As we know, inflation causes currencies to lose value over time. The value of the US dollar today has dramatically gone down compared to what it was a century ago. A good example to show this is the value of housing.
Back in 1929, the average price of houses in the United States was around $6,500. Looking at it now, this price is quite low, considering that the average price for houses in 2024 was $420,000. All this is the work of inflation, showing just how the dollar has fallen. Now, in 2029. The average price of 10kg of gold was roughly $7,300, an amount that’s enough to buy one house. In 2025, the same amount of gold will easily retail at over $930,000.
This is enough to buy two houses. When we put down all other factors, it would make a lot more sense to put gold in a safe somewhere than it would to store cash.
What raises the price of gold?
But now, someone would want to ask, what really drives the prices of gold up? Well, unlike other assets, the supply of gold is limited, meaning that it operates on different terms, unlike traditional investments. Often, gold is inverse to inflation, geopolitical tension and volatility. Let’s explain some of these factors.
When geopolitical tensions are high, and stock markets are volatile
When such happenings occur, investors are nervous, prompting them to release risky investments and embrace safe-haven assets. Now, since the demand for gold is high, yet the supply is finite, the prices tend to go up.
For example, during the US-China trade dispute of 2018-19, the price of gold went up by around 20%. Also, after the Brexit election results, the price went up by 20%. So, whenever there is uncertainty, there is a high chance that the price of gold will go up.
When interest rates are falling
Holding gold involves an opportunity cost as, by itself, it doesn’t provide income. When the interest rates are low, the opportunity cost is lower as there are fewer chances of receiving high income from other asset classes. The inverse is true. According to Piero Cingari of Capital.com, people often seek safety in gold whenever they are concerned about losing real value from assets like cash and US government bonds.
These assets tend to dwindle in value whenever there is an expectation of inflation rising faster than nominal yield. All in all, gold is a solid asset that can be depended on during times of inflation. Since gold is an international commodity, the inflation in one place of the globe could hardly affect it. Therefore, adding to the pointers we just mentioned above, we can easily say that gold is a safe haven during market volatility and inflation.
