It says something about gold’s powerful grip on our collective imagination that when confronted by a world of trade tariffs, geopolitical uncertainty and armed conflict, many people – experienced investors and regular citizens alike – put their hard-earned money into precious metals.
Yesterday, gold prices surged past $5,000 an ounce to a record high. This milestone follows months of price rises in gold and silver. Bullion's perceived status as a safe haven amid a weaker US dollar, simmering international tensions and persistent inflationary rises explains its popularity, but the consequences of this boom will be felt far and wide.
As with any abrupt change in the price of a commodity, there will be winners and losers. Retail jewellery sales usually drop amid higher values for gold and silver as consumers wait for a price correction. Small gold shops that rely on high turnover will suffer more while luxury brands are able to better weather the story.
High gold prices often expose the weakness of troubled national currencies. As investors big and small rush into gold, capital flight from local currencies can exacerbate financial problems in countries battling inflation or even economic sanctions, with Iran being a case in point.
At societal level, too, soaring gold prices can have real-world effects. In many countries, gold is used for dowries, with wedding jewellery joining savings as a way of securing a couple’s future. High gold prices can lead to families taking the painful decision to postpone important weddings. That said, there are those who will welcome this price rise, as well as speculation that gold could increase even more this year.
Many central banks like high-value gold as a hedge against dollar volatility, sanctions and geopolitical risk generally. Gold traders and refiners will benefit, as will wealthy investors. But as prices rise, so do risks – as with any precious metal that’s suddenly in high demand, smuggling and informal gold flows could increase, leading governments to tighten controls on gold imports and exports.
A lot of gold demand is fuelled by fear of uncertainty, and a lack of trust in institutions and currencies. It is advisable for governments to redouble their efforts to manage inflation and defend currency stability. Crucially, communicating policy clearly is a key way of reducing panic or hasty investment decisions.
If people trust their currency and banks, fear-driven and speculative gold demand cools naturally. But it is important for people to realise that gold is not a fool-proof way to protect one’s savings or investments. Writing in The National earlier this month, Ken Fisher – the founder of global investment adviser Fisher Investments – said success in gold “depends almost entirely on luck, not skill”.
Noting that gold is “historically far more volatile than stocks and bonds”, Mr Fisher, whose company has $285 billion of assets under management, said returns on the metal “cluster in big booms, big busts and long fallow periods, requiring impeccable market timing … or, more likely, luck”.
People are largely free to invest as they see fit, and the glitter of gold will always be alluring. However, it is the duty of governments and central banks to provide a sense of institutional and economic calm, even at times of heightened global nervousness. What is truly priceless would be stability in the world’s economy.
