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Is Global Economic Uncertainty an Opportunity for Gold to Shine? With more global economic uncertainty on the horizon, perhaps it is time to consider gold as an essential portfolio addition.

By Dmytro Spilka Edited by Jason Fell

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The price of gold has never been higher as the precious metal's status as a safe-haven investment option has driven both retail and institutional interest in 2024. With more global economic uncertainty on the horizon, is it time to consider gold as an essential portfolio addition?

Much of gold's (XAU/USD) price performance has been driven by fears over growing tensions in the Middle East, along with Russia's ongoing involvement in Ukraine. Economic uncertainty in China has also seen domestic investment in gold bars and coins rise 28% from 2023 levels.

"Chinese investors are worried about the future of other asset classes, and they're turning to gold as a way to protect their investment portfolios," said Shaokai Fan, global head of central banks at WGC. "Gold has actually done very well in renminbi terms, and very well compared to other asset classes in China."

With geopolitics, an uneven post-pandemic recovery, and an election year impacting many global economies in 2024, some institutions here in Europe and abroad are flocking to gold as a means of finding stability amid uncertainty.

Navigating uncertainty.

On a performative level, gold has consistently trailed the S&P 500. In Q1 2024, XAU/USD had grown 6% in comparison to the S&P 500's 10%, while five-year returns show gold trailing the S&P 500's 84% returns by almost 20%.

But this is to be expected. Gold isn't a growth stock, it's a store of value that can aid investors in cycling their liquidity out of volatile domestic markets. It's for this reason that institutions have long identified gold as a safe haven during times of severe political and economic uncertainty.

The 21st Century has been far from peaceful, but gold's safe haven credentials have stemmed long into human history as a means of hedging against collapsing empires, political coups, and failed currencies.

Gold's practical historical use has equipped the metal with a stellar reputation among institutions as a reliable safe haven option. Its 12-month returns of 12% from Q2 2023 to the end of Q1 2024 comfortably outpaced the 9.1% peak rate of U.S. inflation recorded in June 2022, illustrating its value as a hedge against devaluation.

Against the backdrop of inflation peaks and Russia's invasion of Ukraine, 2022 saw central banks stock up on gold in record-breaking numbers, with total purchases more than doubling 2021 levels. Additionally, gold buying from central banks has remained in positive territory for 13 consecutive years following the fallout of the financial crash of 2008.

Measuring gold's economic resilience.

Historical outperformance demonstrates the resilience of gold in the face of economic downturns.

In six of the past eight stock market crashes over the last 40 years, the price of gold has increased. While this change is driven by sentiment, it has empowered more institutions to build their wealth while other markets have struggled.

During the 2007 to 2009 recession, for instance, gold prices climbed 25.5% while the S&P 500 tumbled 56.8%. It's for this reason that exposure to the metal during uncertain times can help to push institutional wealth higher.

Studies have shown that gold is in its own league when it comes to reacting to market uncertainty. This means that gold prices actively go up as geopolitical or economic tensions rise, and despite these tensions, the risk associated with gold as an investment remains unchanged.

As a result, when global uncertainty grows and investors turn their attention towards gold as a safe haven, the precious metal shows no inherent signs of volatility.

Understanding the fallacies of gold.

At this stage, it's worth highlighting that gold isn't a flawless hedge against economic uncertainty. During times of inflation, more stabilizing investments such as residential real estate, which can hold its value and even make gains during market fluctuations due to the economic needs associated with housing can outpace gold returns.

Gold is a "dead asset," which means that it has less functionality than the likes of stocks or real estate, is in no way consumable, and has no necessity-driven needs attached to its use.

While real estate markets gain value through housing needs and oil stands as a finite energy source, gold doesn't feature the same demand which makes it altogether less predictable as an investment.

"It's interesting that this phrase 'safe-haven' gets thrown about when it comes to investing in gold. It doesn't always make sense to hold gold, which doesn't give a yield," adds Brian Gould, head of dealing, Australia at Capital.com.

Gould notes that although gold can act as a functional safe haven option in a lower interest rate setting, its effect is adversely impacted when investors hold gold against the U.S. dollar, which does produce a yield.

Safe haven investing in the age of bitcoin.

Bitcoin has long been referred to as 'digital gold', and with an impressive rate of growth and flexibility, could the digital currency really offer a more functional alternative to institutions looking to hedge against economic uncertainty?

"The price action has still been driven by retails primarily," explained Mathew McDermott, head of digital assets at Goldman Sachs. "But it's the institutions that we've started to see come in. You really see now the appetite has transformed."

"Last year was tough but just coming through to this year we've seen a big sea-change not only in terms of the types of clients but also in terms of volumes," McDermott added, before acknowledging a "psychological shift" for institutional investors.

While the Bitcoin Spot ETF has made the cryptocurrency, which has posted 12-month returns at the end of Q1 2024 of over 150%--far outstripping that of gold and the S&P 500, more accessible to institutions, its volatility is unprecedented and this makes it far too erratic to be a safe haven option. BTC also struggled to find momentum at a time of widespread tech stock sell-offs in 2022 and has formed a correlation with Wall Street.

Gold, on the other hand, has been made increasingly accessible at institutional level through a range of high-capability API solutions offered by prime brokers boasting low-latency connectivity to OTC venues, which has helped to make gold both more accessible and far more straightforward to trade effectively.

Gold to mitigate uncertainty.

Although gold's status as a safe haven option for institutions has been challenged, particularly in high-interest circumstances, the precious metal has consistently proved its worth amid testing economic conditions.

As geopolitical tensions and economic uncertainty continue to grow on a global scale, it's no surprise that institutional interest in gold is once again rising. As a low-risk option that's proven its worth time and again, there's no better hedge when headwinds intensify.

Dmytro Spilka

Entrepreneur Leadership Network® VIP

CEO and Founder of Solvid

Dmytro is a CEO of Solvid, a creative content creation agency based in London. He's also the founder of Pridicto, a web analytics startup. His work has been featured in various publications, including The Next Web, Entrepreneur.com, Huff Post, TechRadar, B2C and Business.com.
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