The first asset we think about when it comes to protecting our wealth, in a situation where the economy has entered a recession and the central banks are flooding the markets with liquidity, is usually gold.

Gold has been traded without any restrictions since 1971 when the United States decided to terminate the Bretton Woods agreements. In these agreements, the US dollar was considered to be a global currency, with the condition that the Federal Reserve had to hold sufficient gold reserves to back the dollars in circulation.

Even today, most central banks hold gold reserves as a store of value.

The value of gold depends on two key long-term factors:

• The US monetary supply. The higher the monetary supply, the higher the price of a fixed quantity of gold. Red indicates the price of gold and black the M2 curve of monetary supply. The M2 money supply includes everything that can be quickly converted into liquidity. As the graph clearly shows, the two variables may be decorrelated for a lengthy period of time but the trend remains the same.

Interest rates are another key factor in the price of gold. When rates go up, gold usually goes down. This tends to happen because gold doesn’t pay any dividends or coupons, so investments that generate returns become more attractive. The fall in interest rates has contributed to the appreciation of gold over this last year.

The price of gold can be expressed by the following formula:

In other words, the movement of gold is inverse to the movement of real interest rates.

Right now, the US 5-year interest rates are close to 0, so in our view, they are unlikely to experience a significant drop.

In a scenario of sharp contraction like the current one, inflation forecasts could even enter negative terrain, leading to what is known as deflation. As the formula shows, this would have a negative impact on the price of gold.

Recessions are marked by low-interest rates and inflation, both close to 0

While it is true that there is a greater supply of money, inflation can only occur if there is a demand for money (certain countries such as Venezuela and Germany after the Second World War experienced hyperinflation in terms of the money supply, but we can rule out this happening with the US dollar because it is the base global currency).

Based on leading investment and consumption indicators, as well as high debt levels and the existing demographic problems, we see greater deflationary than inflationary risks. Although this could have a negative impact on gold in the medium term, in the short term these dynamics could continue to have a favourable effect on the price of this precious metal.

Gold, therefore, offers a safe haven during low-interest-rate environments, but we believe that real rates will not fall much further and there is a significant risk of deflation, which could penalise its price.