Why gold matters

Gold stands as a symbol of enduring wealth, a foundation for financial systems, and a vital component in various industries. The physical and chemical properties of gold, such as its non-corrosiveness, malleability, rarity, and luster, make it highly valuable across different industries, including technology, jewelry, and investments. The price for an ounce of gold has increased steadily, 25 years ago the price was $272, 10 years ago $1,150, 5 years ago $1,900 and today the price is $4,063 and seemingly heading for $5,000. Investors and central banks favor gold as an asset for wealth preservation, diversification, and as a hedge against economic instability, inflation, and geopolitical crises, with its demand and price often influenced by global economic factors.

Gold is categorized as a noble metal due to its resistance to corrosion and its mostly non-reactive nature with other elements. This characteristic is what makes gold stand the test of time, retaining its allure and value. This is due to its inability to fulfill the electron demands of electronegative oxygen, which leads to weaker polar covalent bonding. Moreover, gold’s chemical inertness, due to its inability to form compounds easily, is another factor that qualifies it as a noble metal. This means that gold does not easily react with other elements or compounds, allowing it to retain its luster and purity for centuries. The complexity of geological processes needed to concentrate gold into mineable deposits, coupled with the difficulty of extraction, compounds its rarity. Gold’s scarcity, amplified by it being one of the rarest elements on Earth, is a significant factor contributing to its high value and allure.

In terms of usage in the world economy, gold is used as a safe haven asset, especially during geopolitical crises and when there is a decline in the value of the U.S. dollar, attracting central bank investments. This is also a trend to use gold instead of the U.S. dollar as many countries such as China and Russia want to reduce their dependency on the U.S. and on the U.S. dollar. For global investors, gold provides investors with portfolio diversification, as it has a notably low correlation with stocks and other asset classes and many professional investors use an allocation of between five and ten percent of an investor’s portfolio for gold.

The consistency of gold in preserving wealth and acting as a stable long-term investment is established through generational wealth retention, its stability during economic downturns and deflation periods and in particular in its role as a hedge against inflation, rooted in its ability to maintain value over long periods and its intrinsic value remaining constant and often increasing in monetary value during inflationary times. Investment in gold is possible through various financial instruments like exchange-traded funds (ETFs) and gold futures contracts. These provide an alternative way to invest in gold without physically owning the metal, making it an appealing and easy option for many investors looking to purchase gold.

Central banks globally have been net buyers of gold annually since 2010, following decades of being net sellers. This trend reached a record in 2022, with central banks acquiring a record amount of gold since 1967, reinforcing its role in economic stability. Gold is used by central banks to balance foreign exchange reserves, serving as a stabilizing asset during economic unrest. Unreported gold acquisitions by nations like China and Russia suggest a strategic move to lessen reliance on the US dollar in global trade, potentially hinting at a shift towards the gold standard. This seems like a smart long-term move as the U.S. shows increasingly protectionist and self-serving trade agreements. The policies of de-dollarization in developing countries and the sanctions on Russia in addition to Trump’s high tariffs have encouraged a shift towards gold as an alternative to U.S. dollar assets.

Gold is also important in manufacturing. Gold’s superior conductivity makes it a preferred material for printed circuits and transistors in the electronics industry. In the automotive sector, gold is integral to the functioning of safety systems such as anti-lock brakes and airbag sensors. The defense and aerospace industries utilize gold for its infrared radiation reflection properties in jet windshields, astronaut helmet visors, and various space-oriented vehicles. Moreover, gold-coated window glass is applied in large office buildings to reflect solar rays, enhancing energy efficiency and minimizing heat gain from the sun.

Global economic instability, such as increased bankruptcies in the US and the eurozone, often increases the value of gold, which is seen as a safer asset. Gold prices can also be influenced by the policies of central banks, including interest rate cuts, which might bolster gold’s appeal as an investment during times when investors are seeking safety. The declining purchasing power of fiat currencies, predominantly the U.S. dollar, prompts central banks to utilize gold as an economic hedge. Market demand and investor sentiment can rapidly affect gold prices based on their reaction to economic forecasts and indicators.

Looking ahead, the future of gold faces challenges and opportunities related to global occurrences such as geopolitical conflicts, natural calamities, and trade disputes. These events can challenge the gold market by affecting its value, often leading to an increase in price. However, these challenges also present opportunities for investors, as they can capitalize on the increased demand for gold during these tumultuous times.

On the other hand, gold also plays a role in a sustainable future. As our world becomes increasingly concerned about environmental sustainability, the demand for gold in green technologies is increasing, presenting another opportunity for growth in the gold market. Gold will most likely continue to grow in importance and in price as the world is trending towards two camps, one led by the U.S. and the other led by China and Russia. The U.S. will continue to rely on their dollar, but the other camp is eager to pivot away from the U.S. and the U.S. dollar and create their own systems backed by gold. In times of global tension, there will be a continued flight to safety, i.e. gold, and Trump’s aggressive tariff policy is also helping gold to gain in importance. If you own any gold, hold on to it, and if you have any savings, put some of it in gold.