The price of gold, which reached a historic high in April 2023, is now facing a challenge to its status as a “safe-haven” investment. Traditionally, investors turn to gold during times of crisis, moving away from higher-risk assets such as stocks. Yet, in August 2023, the S&P 500 stock index also hit a record high, a phenomenon that has historically been unusual. This simultaneous rise in both gold and stock prices suggests that the traditional hedging effect of gold may be fading.
Historically, gold has been viewed as a secure investment during economic downturns. For instance, it rose significantly during the oil price shocks of the 1970s, when the global economy faced recession. Conversely, gold prices fell during the late 1990s as stock markets thrived and again after the recovery post-2009. However, since that time, gold’s trajectory has increasingly mirrored that of stock markets. Recent research indicates several factors contributing to this convergence, thereby diminishing gold’s reputation as a safe haven.
Currently, the global economy is emerging from a phase of high inflation and elevated interest rates. Central banks worldwide are beginning to reduce interest rates, which is expected to stimulate household spending and business investment. Economic growth indicators are on the rise, alongside corporate earnings, with positive sentiment about the potential impact of artificial intelligence (AI) on productivity and growth. These factors have contributed to the booming stock markets.
Nevertheless, geopolitical tensions, particularly from Russia’s invasion of Ukraine and conflicts in the Middle East, are creating uncertainty in stock markets and the broader economy. Such instability can significantly influence international commodities, including oil and food prices. Additionally, the unpredictable nature of U.S. President Donald Trump‘s trade policies adds another layer of risk, with tariffs fluctuating unpredictably. These uncertainties may drive investors to consider gold as a more stable alternative, which could explain its current demand and high trading price.
To understand the ongoing demand for gold, it is essential to examine broader market trends. Following the dot-com crash in the early 2000s, commodities like gold began to be treated similarly to other financial assets. The introduction of exchange-traded funds (ETFs), with the first gold ETF launched in 2004, made it easier for investors to buy shares in gold. The proliferation of these funds, particularly after the global financial crisis, has transformed gold into a staple asset in investment portfolios.
Furthermore, the status of the U.S. dollar as the world’s primary reserve currency is under scrutiny. Countries are increasingly questioning whether to conduct trade in their own currencies instead of relying solely on the dollar. This shift, driven partly by uncertainties surrounding President Trump’s administration, has prompted central banks to increase their gold reserves as an alternative asset.
Since 2009, especially over the past decade, gold has largely followed the same trajectory as stocks, signaling a shift away from its traditional role as a hedge against stock market declines. Gold is now viewed as an investment asset in its own right, rather than merely a safety net.
Despite these changes, gold has not lost its allure. Its limited supply, coupled with its desirability for jewelry and industrial applications, lends it a unique value. Acknowledged for its intrinsic worth worldwide, gold is likely to remain in demand, albeit now as part of a diversified investment portfolio rather than a standalone safe haven.
David McMillan, the author of this analysis, has no financial ties that would influence the content of this article and has disclosed no relevant affiliations beyond his academic role.
