Investment Professionals


Inflation and Ukraine Crisis Support Gold


After a strong rally in 2019 and 2020, gold traded sideways last year. Stock markets surged higher, and investors priced in higher US interest rates, blunting gold’s allure. When US interest rates rise, the value of the US dollar also rises, meaning it requires fewer US dollars to buy gold.

Cryptocurrencies like bitcoin also surged. Crypto poses a challenge to gold, as it gives investors alternative ways to hedge against fiat currencies.

As we head into a new year, signs are suggesting things could be looking up for gold.

Gold and geopolitics: the safe haven

Disruptive geopolitical events usually damage shares and bonds. This is because when turmoil strikes, investors flee risk. The value of bonds and shares are determined by what they’ll do in the future, or by their future cash flows. When investors worry about the future, they naturally ditch assets whose value derives from it.

Gold Has Performed Well In Times Of Crisis


Source: Bloomberg, ETF Securities, 14 February 2022

Gold is different and unusual in that it can thrive during political unrest. Examples of this are 9/11, Brexit and COVID-19—during which gold outperformed shares and treasuries.

There are good reasons that gold does this. Gold has a proven history as a safe-haven asset. More fundamentally, gold has no cash flows, unlike shares, bonds, property. This means it cannot be valued based on future cash flows.

Right now, there are many potential triggers. These include Russia and Ukraine, Taiwan and the South China Sea, and Iran. If these or any other shocks do come about, gold could decouple from a falling share market, as it has done in the past.

Inflation hedge and currency debasement

Gold is also a known inflation hedge. And inflation is the first word on investors' tongues today, as it storms higher in the US and around the world.

When higher inflation numbers were printed last year, many investors shrugged it off. They believed “inflation is transitory” and would fade as covid stimulus packages subsided.

But in 2022, inflation has continued rising. The USA’s consumer price index, the main gauge of inflation, hit 7% in December. It looks increasingly like inflation will be stickier and more enduring than many optimists hoped.

Higher inflation has historically supported gold. According to the World Gold Council, gold performs best when inflation is above 3%. When inflation rises, the value of paper money declines. This means you can buy less gold (i.e. that prices are higher).

The past six months – as inflation has risen – gold has outperformed major benchmarks. It has beaten the S&P 500, Nasdaq 100, US aggregate bonds, bitcoin and even TIPS.

Gold Has Outperformed As Inflation Treads Higher


Source: Bloomberg, ETF Securities. Data from 11 Aug 2021 – 11 February 2022

Why not gold miners or cryptocurrency?

Investors curious about gold also sometimes ask about bitcoin and gold miners. Questions about bitcoin became particularly prevalent last year, as headlines claimed it was replacing gold.

From where we sit, bitcoin has merits as an investment. However, it is unlikely to function as a substitute for gold. Bitcoin is much riskier than gold and rarely regarded as a safe-haven. Relatedly, it tends to underperform in periods of heightened volatility, such as during March 2020’s covid selloff where it lost half its value.

Gold Miners Have Chronically Underperformed


Source: Bloomberg. Data from 22 May 2006 – 11 February 2022.

Gold miners for their part are exposed to the gold price. However they have enjoyed no breakout in 16-years, and have strongly underperformed both physical gold and the stock market.


Gold is known for being unpredictable. For some investors, this i