Gold (gold)
Always believe in your soul
You’ve got the power to know
You’re indestructible, always believing
-Spandau Ballet (1983)
I imagine that most central banks secretly dream about becoming a safe haven.
Yes, it comes with a lot of responsibility, and you have to keep inflation down while not hindering economic growth, but if you do it well, oh, the glory of all the other central banks flocking to you.
Since the beginning of global finance, the top spot for safe haven has been held by gold. When uncertainty storms were raging, everyone sailed towards gold because it held its value well and did not pick sides.
In modern times, gold has often shared the spotlight with USD, the two of them dancing along inversely correlated because gold doesn’t pay interest and thus has less appeal when rates are high and the dollar is strong.
The turn of the millennium brought a third contender for the popularity prize, namely the euro. Since then EUR has steadily built a rep of being solid and surpassed gold for the position of Lieutenant Safe Haven.
That was until this week, when the European Central Bank (ECB) released its annual report on the international role of the euro and disclosed that gold is now again the second-most-favored asset for central banks to keep in reserve at 20%. USD is still preferred with 46%, and EUR is relegated to third place with 16%.
There are several reasons for gold’s strong comeback that have been underway for a while.
With Russia’s invasion of Ukraine in 2022, the inverse relationship between gold and USD broke down and gold became more of a geopolitical hedge.
Countries less aligned with the US and Western Europe have chosen gold as their safe haven asset over USD and EUR.
Due to increased demand, the price of gold has also reached record-highs, and that trend was amplified this year when uncertainty about American trade tantrums, debt, and general economic state caused the dollar to weaken and made gold glitter even more.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.