Gold: a safe asset

3 min. reading
Commodities / 10 September, 2021

Sofía R. Ustáriz Journalist

In our daily lives, we have constantly heard phrases such as “gold never loses its value” or “the best safe haven asset is gold”, but… How true are they? Is it true that gold never loses its value or that it is the best safe haven asset?

At BBVA New Gen we are committed to providing you with all the information you need to make the best financial decisions and that is why today we will explore the characteristics, advantages and disadvantages of gold as a safe haven asset and how it can be recommended to protect the value of your capital.

How to invest in different currencies

How to invest in different currencies

Private Banking clients are increasingly more interested in investing in different currencies. Structured products offer solutions to materialise this type of investment idea.

Gold as a safe-haven asset Why?

A little background on gold…

Before the Bretton Woods agreements, most countries based the value of their currency on the amount of their gold reserves (gold standard). With these agreements, in 1944, the Allied countries of World War II agreed to calculate the value of their currencies according to their foreign exchange reserves, by which time the US dollar (USD) was taken as the main reference since the US was the country with the largest gold reserves for that year.

However, in 1971 the Bretton Wood system collapsed, due to the US economic crisis, the devaluation of the dollar and the uncoupling of the gold-dollar standard.

The gold standard today

Today, the gold standard is still in force and many central banks around the world maintain this metal as a reserve for the value of their currency in circulation. Gold is a scarce commodity, so it is a rare case of price increase proportional to the increase in its demand, which is why in times of crisis central banks amass gold to protect the value of the currency, while individuals buy gold to protect their capital in case of currency devaluations.

In fact, after the 2008 subprime crisis the price of gold began to reach record highs, up to US$1900 per ounce, with high demand from investors seeking to protect their money. Its high liquidity – the ability to obtain immediate cash as a financial asset – and low price volatility made it the perfect safe haven asset.

Inflation, deflation and gold

To put it in basic concepts and concise explanations: the value of gold depends 1) on the countries’ currency money supply and 2) on real interest rates. As a country’s monetary supply – money in circulation – of foreign currency decreases and interest rates fall, the price of gold rises, while the higher the supply of currency in circulation and the higher the real interest rates, the lower the price of gold, since investments in bonds with high interest rates are more attractive.

Therefore, gold is the perfect safe haven asset for times of inflation, as its value will withstand market corrections, but it would be wise to think twice before investing in gold in times of deflation.

However, in the last 15 years gold has accumulated a revaluation of 300%, which means that in the long term gold will always be a good safe haven asset, as the economy in general tends to inflation – remember that the economy is cyclical – and that is what allows its growth.

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