Macro Minutes

It’s a common belief that gold shines brightest during times of economic turmoil or geopolitical conflict. Many view it as a “safe haven” asset that retains its value when markets falter. However, the reality is more nuanced. Gold’s performance during recessions and wars depends heavily on the broader economic and monetary environment, particularly the level of interest rates. High interest rates, often implemented to combat inflation, can significantly diminish gold’s appeal. Why? Because gold, as a non-yielding asset, struggles to compete with interest-bearing alternatives like bonds or savings accounts during such periods.

Furthermore, central banks play a crucial role in gold’s market dynamics. In a tightening monetary environment, where central banks aim to reduce money supply, they might even sell gold reserves to bolster liquidity. This reduces demand for the precious metal and can suppress its price. On the other hand, during periods of expansionary monetary policy, when central banks lower interest rates or increase money supply, gold tends to benefit. Central banks might add to their gold reserves to hedge against currency devaluation or bolster confidence in their balance sheets. This divergence highlights that gold’s performance is not inherently tied to crises like war or recession, but to the monetary response that accompanies them.

In short, gold’s reputation as a crisis asset needs context. If high interest rates and tight monetary policies dominate, gold may struggle to shine. But in looser monetary environments, it often thrives. Investors should assess these factors before assuming gold will always outperform in turbulent times.