Gold is one of the very rare assets that is universally considered a safe haven.
For centuries, people have bought and stored gold in order to protect themselves against economic and geopolitical instability. More than an investment, gold is the ultimate guarantee against the collapse of the existing world order. If fiat currencies go to zero – as French philosopher Voltaire claimed they always do – then gold unequivocally becomes the go-to medium of exchange.
This year, investors are faced with several major challenges – and gold is the often-cited solution against most of them.
First, inflation is reaching record highs in most of the developed world and consumers are losing purchasing power at breakneck speeds. Consequently, hedging against inflation is every investor’s priority.
Secondly, Russia’s decision to invade Ukraine has plunged Europe in its worst crisis since 1945 – another reason to invest in safe haven assets.
Third, the world’s stock markets are dropping at breakneck speed: since January, the S&P 500 is down 12%, the Nasdaq has fallen 18%, the French CAC 40 has plunged 17%, the German DAX has lost nearly 20% of its value, and the Japanese Nikkei is almost down 15%.
Finally, real bond yields are negative and don’t provide any meaningful protection against the rapid currency devaluation we are witnessing.
Should you buy gold right now to protect your purchasing power?
The argument in favor of gold is certainly compelling.
As mentioned, traditional assets don’t offer protection against the decline of purchasing power. In parallel, gold prices are surging to record highs. Since 2020, the yellow metal is up 33%, and the price recently broke the all-time high of $1800 setback in 2013.
In addition, gold is undeniably a safe asset to hold over long periods of time. Since 2000, gold prices have risen by 21%. This is not enough to make you wealthy, but it certainly provides decent protection against inflation. It is the personification of a safe, stable, and conservative investment.
Given the very serious threat of nuclear war – one political analyst claims there is a 10% chance of nuclear war – gold would provide survivors with a powerful means of exchange. Obviously, nobody wants to see the world annihilated, but ultra-conservative investors seeking the ultimate refuge can’t go wrong with owning gold.
However, investors should remain cautious about buying in gold right now.
Indeed, prices have risen so much that you risk buying at the peak of the bull cycle. If historical patterns are any indication of future movement, we may experience a significant dip should the situation in Europe come to a peaceful resolution in the coming months. If that happens, investors who bought for speculative reasons may be burnt badly.
Furthermore, central banks are cautiously proceeding with interest rate hikes that are meant to combat rampant inflation. If they succeed, gold will correct due to the return of macroeconomic stability.
In sum, investors should only buy gold right now if they are prepared to hold on to the asset for the next decade or longer.
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