HomeEconomyWhy is gold considered a safe haven for investors?
By Economy Middle East
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March 9, 2022 5:07 am

Why is gold considered a safe haven for investors?

Saudi first in the Arab world and 18th globally with reserves of 310.3 tons
Gold market
Gold market

The price of an ounce of gold exceeds two thousand dollars as a result of the Russian-Ukrainian war. This news did not surprise markets and investors. Gold has long been considered a safe haven in times of economic crisis, security turmoil or geopolitical developments.

In situations of political and economic uncertainty, investors quickly flee the bond and stock markets and head towards the yellow metal where risks are much lower.

Why is gold called a safe haven? Simply, because it is the safest metal that allows individuals and investors to preserve their wealth during crises, as it has strong characteristics, which are its ability to retain its value and resistance to factors of change and strife.

Also, gold occupies a very strong position in the global economy as it is considered a benchmark for determining the economic status of countries.

Bretton Woods Agreement

 

The Bretton Woods Agreement – the common name for the International Monetary Conference – was among the powerful influencers on the gold price in 1944.

This agreement was made after World War II in the Bretton Forests of New Hampshire, USA. Its main objective was to agree on a new international monetary system in order to secure global economic stability and growth, by fixing the exchange rate of an ounce of gold at the equivalent of 35 US dollars.

This system continued until August 15, 1971, when US President Richard Nixon announced the suspension of the convertibility of the dollar into gold, which is the most important pillar of the Bretton Woods system.

This led to the US dollar losing its attractiveness as an international currency, as it became connected to trade deficits as well as the government’s budget deficit. The result was the dollar’s pegging to other currencies.

The price of an ounce of gold was estimated in 1955 at $35, and in 2011 it rose to $1920. In August of 2020, Gold reached its highest level ever at $ 2074.88, as a result of the weakness of the dollar and bets on more stimulus measures to revive the economies wracked by the Corona pandemic.

Changes in the price of gold over decades

 

Over the past several decades, the price of gold has been affected by many different factors. The history of gold prices witnessed significant rises and falls.

The longest period was from January 1975 to February 2005. During this period, the price of gold rose and fell but always returned to an average price of about $400 an ounce.

The only notable exception was between 1979 and 1980, when the price of gold reached about $820, due to the rise in crude oil prices, and the ensuing inflation during the same period.

Between February 2005 and August 2011, a noticeable increase was recorded in the price, from $400 to $1,880, with the exception of a decline during the second half of 2008 in the midst of the global financial crisis.

After commodity prices reached their peak in August 2011, the price of gold fell again from $1,880 to $1,050 in December 2015 and starting in 2016 gold began stabilizing at an average of about $1,200 until the end of September 2018.

gold

Gold drivers

 

Because gold is denominated in dollars, the greenback can have a significant impact on the price of gold. In other words, a weak dollar makes gold relatively less expensive for foreign buyers and thus may raise prices.

In contrast, a stronger dollar makes gold relatively more expensive for foreign buyers, which can lead to lower prices.

Currency notes or notes tend to lose value over time. If it continues like this, it is likely that gold will continue in an uptrend as investors look to it given its safety and potential as a hedge against currency depreciation.

World gold council

 

In its monthly report for the month of February, the World Gold Council announced that gold jumped by 6 percent on a monthly basis, to $ 1910 per ounce, which is the highest monthly gain since May 2021.

The board said safe-haven demand has outpaced higher nominal yields and a marginally stronger dollar, as Russia’s invasion of Ukraine increased volatility and uncertainty.

He explained that COMEX net positions (gold futures) rose to their highest level since July 2020. Gold ETFs added $2 billion (35 tons) to global managed assets.

According to the report, the risk of an economic slowdown amid rising inflation may make monetary policy decisions more complex, which supports investment demand for gold.

The Federal Reserve was due to announce later this month that it would start raising interest rates, but the Russia-Ukrainian war has created uncertainty about the Fed’s willingness to take this step in order to contain inflation.

International gold reserves rankings

 

Statistics from the World Gold Council showed that the United States ranked first as the largest country in gold reserves in January 2022.

In a table of 100 countries with the largest gold reserves, the Council indicated that the US took the lead in the largest gold reserves in the world in 2021 with a reserve of 8133 tons, followed by Germany second with 3,359 tons, then Italy third with 2451 tons, and then France came in Fourth place with 2436 tons.

..and in the Arab world

 

At the Arab world level, Saudi ranked first and 18th globally with reserves of 310.3 tons, followed by Lebanon in second place and 20th globally with reserves of 286.8 tons, then Algeria and 26th globally with reserves of 173 tons, Libya and 34th globally with reserves of 116 tons.

Iraq came fifth and ranked 39th globally with reserves of 96.3 tons, followed by Egypt in sixth and 41st globally with reserves of 80 tons. Kuwait is followed by seventh and 43rd globally with a reserve of 79 tons, then Qatar in the eighth and 48th globally with a reserve of 56 tons. The UAE ranked ninth and 49th globally with a reserve of 55.4 tons, and Jordan came tenth and 53rd globally with a reserve of 43 tons.