Gold’s appeal in a volatile world

The most interesting characteristic of the yellow metal (and Bitcoin as its digital equivalent) is that, when held in physical form (or, in the case of Bitcoin, in a decentralised wallet), it is one of the few assets that does not represent a claim against a counterparty - a feature that is particularly valuable in the context of systemic risk.

From 2003 to 2011, with the rise of systemic risk during the successive banking and then eurozone debt crises, gold rose sharply due to the fall in interest rates and the USD, but above all because of its remarkable characteristics. A share entitles you to the residual cash flow of the company in question after all other creditors have been paid. A US Treasury bond entitles you to a coupon paid by the US government, and so on. With physical gold, however, you are not dependent on the goodwill or financial capacity of a counterparty. While there is currently no systemic risk for Western investors, this is not the case elsewhere. The war in Ukraine and the increasing use of financial sanctions have heightened global interest in assets that exist outside the traditional financial system, reinforcing gold’s role as a hedge against geopolitical uncertainty.

History has shown that in extreme cases, governments can even restrict gold ownership. During the Great Depression, the Roosevelt administration revalued gold and made private ownership illegal, forcing citizens to exchange their gold for cash. This highlights a key limitation - gold can protect wealth, but only as long as governments allow it.

The long-term debate: Gold vs. Equities

In well-functioning capitalist economies, the relative performance of equities to gold is subject to long, multi-year cycles of under- and outperformance. Nevertheless, the long-term trend favours the productive (equities) over the non-productive (gold) real asset.

This means that while gold experiences strong performance during periods of crisis or inflation, equities that provide ownership in companies that generate profits and expand over time tend to outperform in the long run. Legendary investor Warren Buffett supports this view, believing that capitalism ultimately drives growth and that equities create more value over time.

However, another school of thought argues that governments inevitably devalue currencies through excessive debt and inflation, making gold an essential protection against long-term monetary instability. This perspective has gained traction following major financial crises and during times of elevated inflation.

Conclusion – How will geopolitics impact gold?

Geopolitical tensions continue to play a major role in gold’s performance. If negotiations for a peace agreement in Ukraine advance, and if such an agreement includes the unfreezing of Russian assets, gold may face a sharp sell-off. However, given ongoing uncertainty, its role as a safe-haven asset remains strong.

While its long-term performance relative to equities is mixed, it remains a key tool for risk diversification. Investors should closely monitor global events, inflation trends, and policy decisions to determine gold’s role in their portfolios.