Fearful Investors May Find Safety in Gold – or a Shiny Illusion

Fearful Investors May Find Safety in Gold - or a Shiny Illusion


 The ongoing battle with inflation, fears of recession, an up-and-down stock market, and concerns about banking stability are making for a turbulent ride for investors. However, instead of reaching for an air-sick bag, many are seeking safety in gold. 

It is not just the collapse of Silicon Valley Bank and Signature Bank earlier this month that has spurred the recent gold rush. Many turned to gold during the pandemic. Since then the inflation resulting from the post-pandemic recovery has accelerated the trend.

Last year gold demand increased by 18 percent, according to the World Gold Council’s “Gold Demand Trends” report. That is the highest level since 2011.

Seeking Safety in Gold

Historically, gold has done well during inflation. That is largely due to the perception that it is a safe investment. As a result of that perception, many investors turn to gold. The influx of investors in the gold market tends to raise the metal’s price.

Even long-time critics of gold can spot a profit-making opportunity by taking advantage of this lemming effect.

Buffet on Gold

Sage investor Warren Buffett has been a lifelong critic of gold as an investment. In a 2011 letter to investors, he wrote, “ Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”

In the same letter, he stated investing in gold was driven by fear and profiting from that fear. 

“What motivates most gold purchasers is their belief that the ranks of the fearful will grow,” wrote Buffett.

Interviewed later that year on CNBC’s “Squawk Box”, Buffett doubled down on that view saying, “basically gold is a way of going long on fear, and it’s been a pretty good way of going long on fear from time to time.”

The Oracle of Omaha must have smelled blood in the water in 2020. That is when Berkshire Hathaway, his investment firm, sunk $560 million in gold mining firm Barrick Gold. Some gold evangelists thought Buffett had got religion. However, it was just a short play. Consequently, Buffett sold his holdings within six months for a profit. 

Central Banks and Gold

Since inflation motivates many gold buyers, the actions of central banks to control inflation play an important role in investor swings to gold. We have seen that with the Federal Reserve’s efforts to hammer inflation down with rapid rate hikes.

However, another important factor in the price of gold is that it is traded internationally in U. S. dollars. As a result, there is an inverse relationship between the dollar and the price of gold.

So, when the dollar trades higher against other currencies, gold becomes more expensive. Consequently, when the dollar declines, gold is cheaper which often leads to more international investing.

Many of those international investors are central banks of foreign countries.

Since 2010, central banks have been net buyers of gold. Russia, for example, has upped its gold buying since it was hit with sanctions following its 2014 conquest of Crimea. At that time Russia was slapped with sanctions. 

China was second to Russia in gold buying over the last two decades. However, most central banks buying gold are in developing countries.

Gold Price Fluctuations

The destabilizing effect of Russia’s invasion of Ukraine in February 2022 may have prompted those countries to seek safety in gold. 

The price of the precious metal topped $2,000 an ounce that same month. However, later a strong dollar and Fed rate hikes drove the price down 20 percent.

Gold did not pass $2,000 an ounce again until this month’s bank failures.

Forecasts Cloudy for Safety in Gold

Going forward, analysts are split on gold’s price. 

ANZ Research recently revised its outlook on gold. It sees the commodity hovering around $2,000 by the end of the year and rising to $2,075 in late 2024.

On the other side of the ingot, Trading Economics sees the price continuing downward. The analytics firm predicts gold will be at $1,779 a year from now.

In January, a Reuters poll of analysts predicted the price would average $1,890 in 2024. 


Gold’s reputation as a safe investment is due to the fact that its price typically does not move down as markets move down. Conversely, it does not go up as markets rise. Therein lies the rub.

The only return on gold is its price appreciation because it can not generate income like stocks and bonds. Furthermore, its price can be volatile.

If you are seeking safety in gold, it may work best as part of a balanced portfolio in the hope that it holds its value during inflation. However, if you are looking for a reliable profit, you might want to use it to bet on the fear of others. If you do not believe me, just ask Mr. Buffett.


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