Timeless Gold




THE fact that gold prices have been subdued over the past year must be one of the most counterintuitive financial market dynamics of recent times. The precious metal is known as a safe haven, and a hedge against rising inflation. We certainly have had plenty of both recently, so why are gold prices down by more than 15 percent in relation to the yearly maximum reached in March? The answer is relatively straightforward: Blame the US dollar.

Since March, the Dollar Index, a measure of the greenback’s performance versus a basket of six major currencies, has gained more than 10 percent. The Federal Reserve was quicker off the mark than other central banks, initiating a series of interest rate hikes that supported the dollar and made it the outstanding performer of the year. Because gold is priced in US dollars, and the two assets have an inverted correlation, the dollar price of gold automatically falls when the currency appreciates in foreign exchange markets.

Another reason capping the upside for gold is the fact that it does not yield any income. This contrasts with treasury notes, for example, which are not just relatively safe reserves of value but also generate a yield. Finally, demand for gold remains soft because, so far, the markets have kept faith in the ability of the Federal Reserve to control inflation. Despite the drop in risk appetite that affected stocks, there has not been a run to gold. That has not always been the case. In the early 1970s, inflation spiked, and investors lost faith in the ability of the US central bank to control it. As a result, the price of an ounce of gold rose from $35 in 1970 to $850 in 1980.

But if we really want to understand the role of gold as an inflation hedge, we must observe a wider period. Over the last 100 years, the value of gold, when measured in dollars, has risen sharply - and at a pace that many will find surprising. Since 1913, when the Federal Reserve was created, the precious metal kept almost all its original purchasing power when measured in US dollars. Meanwhile, during that same period, the dollar lost more than 98 percent of its value.

But let us look even further back in time. Records tell us that between 1800 and 2022, the US dollar experienced an average inflation rate of 1.44 percent, which translates into a cumulative price increase of 2,665 percent. In other words: Today we need almost 23 times more dollars than in 1800 to buy the same product. Something with a price of $100 in 1800 would today cost $2,300. Meanwhile, the purchasing power of an ounce of gold has hardly changed.

We are living through interesting times, with high inflation, an energy supply shock, geopolitical uncertainty, China’s economic challenges and the financial consequences of climate change. Against this background, gold should remain the ultimate safe haven. And its inflation-beating power is only one of the reasons why. If a complete collapse of the financial system was to occur, the precious metal would be one of the few assets to retain value.


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