Investment Strategies for recession: Gold's Rise Amid Global Unrest

Analyze gold's surge to $2,685/oz as a key investment strategy during Middle East conflicts, reinforcing its status as a safe haven asset.

As gold prices ascend to unprecedented heights amidst a backdrop of escalating conflicts in the Middle East, investment managers are fervently deliberating the merits of gold as a viable asset class, rather than a mere emotional whim. The enduring allure of gold, a precious metal that has captivated humanity for centuries, shows no signs of waning. The remarkable surge in its price this year, reaching an astonishing $2,685 per ounce in September, underscores its historical role as a safe haven during tumultuous times. This peak was achieved even as stock and bond markets exhibited resilience, suggesting that gold is not merely an alternative to traditional asset classes, but rather a complementary investment.

Since the dawn of January, spot gold has experienced a meteoric rise of nearly 32 percent, now standing at $2,721 per ounce (source: BullionVault). This upward trajectory can be attributed to a confluence of geopolitical uncertainties, including the specter of a closely contested U.S. election, interest rate cuts, and other macroeconomic forces that have collectively propelled the price of this yellow metal. The demand for gold coins has surged dramatically, with sales revenues skyrocketing by 118 percent as investors increasingly gravitate towards tax-efficient investments. Concurrently, revenues from customers selling bullion bars and DigiGold back to The Royal Mint have surged by 86 percent and 91 percent, respectively, as investors seize the opportunity presented by record-high prices.

As the price of gold continues its steady ascent, the demand for precious metals has concurrently strengthened. A cocktail of persistent geopolitical uncertainty, global volatility, and declining interest rates has driven gold prices in sterling to rise consistently throughout the third quarter, with a remarkable 20 percent increase observed in this calendar year alone. This momentum has invigorated interest in gold, evidenced by a staggering 63 percent year-on-year increase in gold bullion sales from The Royal Mint. Furthermore, the total number of customers purchasing gold has risen by 11 percent during the same period.

Nevertheless, the outlook for demand remains a critical factor. While armed conflicts and political unrest have seemingly exerted minimal influence on broader financial markets, global conflicts have nonetheless bolstered gold demand. In nations grappling with sanctions or capital controls, gold emerges as a formidable alternative to traditional cash reserves.

The Global Financial Crisis (GFC) of 2008-2009 marked a watershed moment in gold's resurgence among central banks. As financial institutions teetered on the brink of collapse and previously secure cash reserves became precarious, gold reestablished itself as an unequivocal store of value. A 2024 Gold Council Survey revealed that 69 percent of central banks anticipate a greater proportion of their reserves will be allocated to gold over the next five years, at the expense of U.S. dollar holdings. Presently, a mere 17 percent of global central bank reserves are held in gold, with a stark contrast evident between the elevated levels in Western economies (60 to 70 percent) and the significantly lower levels in China (5 percent) and India (10 percent). This disparity suggests a clear trajectory for future purchases.

From a risk-return perspective, the rationale for allocating to gold is compelling. Since the publication of our 1992 white paper, returns have remained robust. While volatility may pose a challenge, gold offers diversification benefits, exhibiting a low correlation (0.1-0.2) with U.S. Treasury bonds and equities, and a negative correlation (-0.2) with other commodities. Thus, as the world navigates an increasingly complex financial landscape, gold stands poised as a resilient and strategic asset for discerning investors.