The power of gold in times of turmoil

In contrast to stocks and bonds, gold has historically been considered a good investment in times of economic volatility. Stocks and bonds carry counterparty risks. However, the precious yellow metal is an asset whose value is influenced by the demand, the desire to buy gold, or give it as a gift, as a hedge against inflation and currency devaluation.

Central banks have realised the benefits of investing in gold for a long time. They now hold more than 35,000 metric tonnes of gold. This is around a fifth of all the gold ever mined. The price of this safe-haven metal is still on the up. The Russia – Ukraine conflict and the associated increase in energy prices, grain prices and base metal prices have added to existing drivers that have caused the cost of living to rocket in the UK and around the world. These factors support the demand and continued increase of the price of gold.

During periods of crisis and global uncertainty, gold becomes a more favourable investment option compared to stocks or bonds. And it’s not only individuals who favour this financial option. Central banks are switching from investing in corporations to opting for a tangible asset in which to store finances. For clarification, a central bank oversees the commercial banking system. It is also the authority when it comes to running the currency or monetary policy of a state or monetary union. Central banks decide how much money to print and can alter the monetary base, unlike commercial banks.

Investing in tangible assets amid conflict

War is the epitome of instability. Amid the Ukraine-Russia war, there has been a sharp rise in the demand for gold. This can be seen on our Live Gold Price Tracker. This is because global markets are responding to the economic instability associated with the conflict and central banks will now assess how Russia’s invasion may further create instability across the global market.

The human suffering in Ukraine is well captured by the tragedy and destruction in the city of Mariupol. It is a sobering example of one of the most poignant humanitarian crises the world has seen in recent times. Mariupol is virtually dust now, and hundreds of thousands of residents are said to be trapped inside destroyed buildings or underground with the constant threat of Russian shelling. It is this level of human suffering and political turmoil that is forcing the price of gold up.

Energy prices rocket as Putin makes his mark

It’s worth considering what is driving the current economic uncertainty. And in particular, which aspects are increasing demand for gold by central banks.

The conflict in Ukraine has negatively impacted the UK economy which was already under inflationary pressure as the global economy re-awakens form two years of disruption by Covid-19. The UK inflation rate has risen to a shocking 5.5%, well above the Bank of England’s 2% target. Supply chains are also being negatively affected. Both Ukraine and Russia are big producers of goods that we import.

Gold however, has an inverse relationship with the U.S dollar meaning that the value of gold increases when the purchasing power of the dollar dips. This benefits central banks in times like these and allows them to protect the value of their reserves by buying gold.

Like several other countries, such as America, Australia and Canada, the UK has banned the process of purchasing Russian oil in response to the crisis. Naturally, there is now a narrower supply. This is resulting in further upward pressure on energy prices. On top of this, many global brands have refused to continue doing business in Russia, leading to even further economic volatility.

Russia is a major supplier of commodities to the European area and provides around 40% of the gas used there. They also produce the third-largest amount of crude oil in the world, falling behind America and Saudi Arabia. A continuing economic slowdown is inevitable, given Russia’s global influence. The impact the conflict has had on commodity trading and the present inflationary pressure will encourage investment demand for gold from central banks and individuals alike. On 7th March, the price of oil rose 9% since the start of the month, reaching above £75/barrel for the first time since 2014.

Beyond energy – food and metal prices soar

As Russia is a key producer in other markets, such as food and metal, the impact on prices is reaching further than the cost of gas. Ukraine and Russia jointly provide around 30% of global wheat exports. And Russia alone was responsible for delivering 16% of the world’s fertiliser. As a result some food and metal prices are rising quickly, adding to inflation.

As the price levels become higher, each unit of currency has less real purchasing power. In response to the Ukraine-Russia conflict, this is exactly what is happening.

Gold as the answer to inflation

Central banks are printing more money to support their economies in response to current inflationary pressures which are caused in part by the conflict. An increase in money supply is a strategy used to ease economic turmoil. However, there are negative effects, such as the devaluation of the currency.

Gold is a fantastic hedge against inflation as it is a finite commodity which means you can’t add to its supply very easily. The Royal Mint plans to make recycled gold a commodity that can be exchange-traded, another reason why central banks believe gold is an attractive investment opportunity. The traditional lever of monetary control, interest rates, have also been near zero for more than ten years. However, on the authority of The Bank of England, they have been put up to 0.75%, bringing rates back to pre-pandemic levels in an effort to ease inflation.

In short, gold has surpassed stocks and bonds in its ability to act as a safe-haven asset in portfolios during times of inflationary pressure. This is why gold is considered a good diversifier. Historically, this finite metal has been the solution to preserving one’s wealth during periods of high inflation and economic and global uncertainty. It doesn’t look like anything will change for the moment. Gold is a highly effective hedge against market volatility and risks.

Gold coins or bullion bars? Buy gold today

If you’re looking to store some of your wealth in this valuable yellow metal, at UK Bullion, we have a great collection of both gold coins and bullion bars. Whether you are an experienced investor or a first-time buyer of gold, we have a range of different weights and styles available that you can choose from.

Contact us today to learn more about the benefits of investing in gold.