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The role of gold in times of crises

By Ghadeer Ghloum

KUWAIT: According to Salman Al-Naqi, Kuwaiti economist and the 2022 first-place research paper winner of the “Kuwaiti Economic Prize”, gold has long been recognized as a safe-haven asset during times of economic uncertainty and global crises. That is due to its unique characteristics, such as independence from government policies, besides its limited supply, which have made it a popular choice for investors and central banks. Because understanding the role of gold as a reliable refuge becomes increasingly important in times of crises, Kuwait Times spoke to Naqi for further information about the influence of this valuable metal’s prices.

Naqi explained gold’s uniqueness, saying: “In times of economic uncertainty and crisis, gold is considered a safe-haven asset for investors and central banks. Gold’s reputation is rooted in its unique characteristics; unlike fiat currencies, gold prices are not subject to government or central bank policies. During economic turmoil, investors often turn to gold as a refuge, driven by the perception that it can maintain value amid financial market volatility. The limited supply of gold adds to its appeal, enhancing its status as a store of wealth.”

Naqi then elaborated on gold being a secure asset for investors, and the relationship between its prices and global crises. “The relationship between gold and crises is characterized by an inverse correlation with traditional assets. When financial markets face downturns, gold values tend to rise, with increased demand as investors seek a hedge against inflation, currency fluctuations and overall economic instability. For example, during the 2008 global financial crisis, the price of gold surged as investors sought the security it offered. Geopolitical tensions can also spur demand for gold as investors view it as a reliable asset transcending geopolitical boundaries,” he said.

Thus, gold’s precious value remains neither effected by political issues nor economic damage. “Central banks, responsible for managing and maintaining monetary policy and stability, traditionally hold gold within their reserves for several reasons. Historically, under the Bretton Woods Agreement in 1944, major currencies were pegged to the US dollar, which, in turn, was tied to gold, providing stability to the post-World War II global economy. Although the Bretton Woods system collapsed in 1971, central banks continued holding gold as part of their reserves, influenced by the legacy of this agreement,” Naqi said.

Naqi spoke about the current status of gold with regards to central banks. “Currently, central banks see gold as an insurance against unforeseen crises. Gold’s liquidity and stability make it invaluable during economic dilemmas, enabling central banks to navigate turbulent periods with greater resilience. Central banks have the ability to influence gold prices through their monetary policy decisions and patterns, impacting factors such as interest rates and currency values, as well as participating in quantitative easing (QE). Global economic conditions and central banks’ responses can affect market sentiment, while direct buying or selling of gold reserves by central banks directly influences supply and demand dynamics, playing a role in shaping gold prices,” he said.

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