Gold is sometimes dismissed as a "barbarous relic" – to quote UK economist JM Keynes – but it refuses to go out of fashion, particularly at times of global stress, inflation and war.

The US Federal Reserve and the UK’s Bank of England raised rates this week to curb high inflation that was already rising before Russia invaded Ukraine, adding to global supply chain woes. More than a decade of massive central bank quantitative easing (creating new money) has arguably been the primary culprit. When a wall of freshly printed dollars, pounds sterling, euros and other currencies comes into conflict with restricted supply, the result is often higher prices. Pent-up demand that built during lockdowns has been unleashed – to a point.

When inflation stalks the land, how can one seek safety, particularly when equities have already become expensively valued in many markets, or when bond yields are thin, and when real estate prices are strong in certain countries? An old “safe” asset is gold and, unsurprisingly, the yellow metal’s price has risen. A year ago, spot gold traded at around £1,256 ($1,650) per ounce (source: Bullionvault); it now fetches £1,483 per ounce. The latest surge in price occurred on 24 February, when Russian military forces invaded Ukraine, starting the biggest European armed conflict since WW2. 

“During times of market turmoil, investors turn to gold given its perceived safe-haven status,” James Luke, fund manager for metals at Schroders, said in a note. 

“Gold prices had been resilient in January and early February, despite sharp increases in US real interest rates – which would usually weigh on them. This is partly due to the geopolitical stress of the Russia/Ukraine situation, and this may continue to underpin moves higher if the conflict worsens or sanctions don’t have the desired effect,” Luke said. “However, even before the situation escalated, we were already seeing signs that institutional demand for gold as a portfolio hedging instrument was turning positive. We think this will continue through 2022, regardless of how the geopolitical situation evolves.”

“Besides looking for a store of value in times of heightened market stress, we believe many investors see the coming rate hiking cycle as extremely risky given the abnormal macroeconomic backdrop. Apart from being highly indebted, developed economies have become reliant on massive monetary and fiscal stimulus. The potential for negative feedback loops (a reaction that causes a decrease in function in response to a stimulus) into the real economy and financial markets as stimulus is removed and interest rates rise, is elevated,” he continued. “In other words, it’s entirely possible that rate hikes and the removal of quantitative easing could have such a negative impact on economies, in which consumers are already suffering negative real income growth, that they are reversed before too long." Other ways of spreading risk look unappealing, Luke said. 

“The cryptocurrency space, which may well have attracted capital away from gold in recent quarters, is also under increasing regulatory pressure,” he said. “Meanwhile, in stark contrast to 2013 (when gold was dumped largely in favour of equity allocations) starting equity valuations are very high.”

Others agree that gold has an important place as an inflation/crisis hedge. 

“Traditional gold was down last year because it’s out of fashion, but it’s a classic inflation hedge and could return as an important store of value,” MaxMyInterest chief executive Gary Zimmerman said. (The firm is a cash management business.)

In July 2020 Lombard Odier, the Swiss private bank, put forward the case for holding gold in portfolios (see here). Fellow Swiss firm Pictet Asset Management said that year, when the pandemic erupted, that gold has an important role to play as a diversifier of risk.

Adrian Ash, director of research at BullionVault, responded acidly to the BoE’s decision to lift official interest rates to 0.75 per cent: “Tweaking bank rates by only a quarter-point is beyond a joke. Returns to cash savers haven't been this far behind inflation since the sterling crisis of the mid-1970s and the rising price of gold says investors expect the gap to get worse,” Ash said.