No More Glitters for Gold?

Gold has been traditionally the most reliable asset in times of economical and political crisis.
Investors typically turn to gold as a way to preserve their hard earned money and wealth.
In recent years, however, the dollar has stepped up the game and increasingly seen as a more
attractive safe haven asset.
So, is dollar inching closer to replace gold as safe haven asset?
There are few factors to consider. Let’s take a closer look at how each of them has performed
during times of economic turmoil over past few decades.

Source: macrotrends.net

As we can see gold prices soared during 2008 global financial crisis while dollar fell sharply.
However things are changing significantly in the recent years as dollar has actually
outperformed gold during periods of economic and political uncertainty like Brexit in 2016,
when it seemed Britain might leave European Union, investors flocked to dollar as safe
investment and sold off gold. Similar pattern could be observed during Russia-Ukraine war as
well, initially price of gold saw a sharp rise which got erased in sell off that continued for over a
month.
Thereafter dollar has been soaring and on a tear. The continued massive influx of capital into
US dollar post COVID-19 pandemic has led dollar to reach its all time high in over a decade. One
of the main reason for dollar’s dominance as a safe haven asset is its status as world’s reserve
currency. Central banks and other institutions all around the world hold large reserves of dollar,
which they use to trade and settle international transactions. The dollar’s reserve currency
status gives it a unique position of safety and stability in times of economic turmoil.
The hawkish approach by Fed to tackle the rising inflation by aggressively increasing interest
rates make dollar more attractive to yield-seeking investors.
The impact of dollar’s safe haven status has led to a decline in demand for gold and created a
downward pressure on gold prices as well.
Though soaring dollar are denting returns of the yellow metal’s investors but it’s worth noting
that it is still holding up in comparison to other commodities. For example Crude Oil is down
more than 25% from its June high. Metals have fallen around 20% from their peak.
There is no doubt that dollar enjoys many benefits over gold, but it is susceptible to inflation
and whims of financial markets which change as per investor’s sentiments.
In conclusion both the asset class play a vital role in diversifying the portfolio and hedge the
market tailwinds. But only time will tell whether everyone’s current favourite strengthening
dollar will continue to enjoy its dominance and live its American Dream or Gold’s shine will
return in near future.