Gold has recently surged past $3,000 per troy ounce—an impressive feat after only just breaching $2,000 during the pandemic. This sharp rise highlights its enduring role as a portfolio hedge against stagflation, recession risk, currency debasement, and policy uncertainty. Despite offering no yield or cashflow, gold has captivated human civilisation for over six millennia. From Ancient Egyptian trade to modern central bank reserves, its story is deeply intertwined with ours. In today’s era of digital disruption and uncertainty, its relevance is once again being reaffirmed by investors and institutions seeking a safe haven.
Currency's golden age
From its initial use as mere ornamentation in modern-day Eastern Europe around 4000 BC, gold's journey into a pivotal medium of exchange began around 1500 BC. The ancient Egyptian empire, leveraging the mineral-rich lands of Nubia, pioneered this transition by producing electrum, a naturally occurring alloy of roughly two-thirds gold and one-third silver. This marked the inception of an official currency for international trade.
The Romans further solidified gold's monetary role with the minting of the first pure gold coin, the Aureus, in 50 BC – its name directly derived from the Latin 'Aurum', meaning gold. Over a millennium later, William the Conqueror's introduction of a coin-based system in England laid the groundwork for the familiar pounds and pence. By 1284, Great Britain issued its own gold coin, the Florin. Meanwhile, on the European continent, the Republic of Florence introduced the gold Ducat, a coin that would rise to become the dominant international gold currency for the next five centuries.
The 18th and 19th centuries marked a dramatic rise in the importance of gold, spurred by major discoveries in California and South America that triggered widespread gold rushes. This period also saw the increasing formalisation of gold's role in global monetary systems, through the implementation of the Gold Standard, which England had informally operated since 1717. By the early 20th century, the majority of nations had followed suit, embedding gold at the heart of global finance.
The 18th and 19th centuries marked a dramatic rise in the importance of gold, spurred by major discoveries in California and South America that triggered gold rushes.
However, the inherent limitations of the Gold Standard became apparent with the outbreak of World War I. The direct tie between the money supply and gold reserves made it increasingly challenging for governments to finance escalating military expenditures through printing currency. Consequently, nations were compelled to suspend the convertibility of their currencies into gold. The post-war landscape, characterised by substantial debt and significant inflationary pressures, eroded confidence in the Gold Standard.
The onset of the Great Depression in 1929 delivered a further blow to the already fragile system. Widespread distrust in banks and paper money led to extensive gold hoarding, exacerbating the economic crisis. This ultimately forced numerous countries to abandon the Gold Standard throughout the 1930s, leaving only France and the United States clinging to the system.
In a move to stabilise the US money supply amidst the economic turmoil, President Franklin D. Roosevelt enacted the Gold Reserve Act of 1934. This transferred ownership of all privately held gold and gold certificates to the United States Treasury. This pivotal action allowed the US to accumulate the world's largest gold reserves, a factor that significantly contributed to the US dollar's ascendance as the de facto global currency. The 1944 Bretton Woods Agreement further cemented this order, with 44 nations pegging their currencies to the US dollar, which was itself pegged to gold at a fixed rate of $35 per ounce.
The eventual decoupling of gold and the dollar in the following decades was spurred by rising inflation in the 1960s, a consequence of expansionary monetary policies aimed at reducing unemployment, coupled with soaring national debt incurred by the Vietnam War. This led to a depreciation of the US dollar in the 1970s, consequently driving up the price of gold. The definitive break came in 1971 when President Richard Nixon unilaterally altered the price of gold and terminated the Federal Reserve's commitment to exchange dollars for gold – an event widely known as the “Nixon Shock”. While this action effectively ended the Gold Standard in practice, it wasn't until 1976 that the system was officially abandoned.
The ‘Initial Public Offering’ of gold
The year 1971 represents a pivotal moment for gold, as the end to the dollar being pegged to gold meant gold could then be freely traded – akin to an Initial Public Offering. This marked a significant transition, propelling gold from its historic role to a mainstream investment vehicle. This accessibility was further amplified by the introduction of the first US gold-backed Exchange Traded Fund in November 2004, providing investors with a cost-efficient form of ownership.
Since the metaphorical IPO, gold has lived through two distinct price regimes. From the 1970s until the 1990s, its primary function for investors was as an inflation hedge. It rallied during the inflationary decade of the 1970s, subsequently followed by a period of decline during the Volcker era of disinflation in the 1980s, capitulating to falling long-term inflation expectations. From the period spanning 2000s to the early 2020s, long-term expectations remained subdued. The primary first order effect appears to have shifted towards US real yields. This relationship can be understood through the lens of opportunity: the balance between holding default risk-free yield-generating US Treasuries and the default risk-free, non-yield-bearing asset that is gold.
Its role no longer purely represents a hedge against inflation, or a monetary relic, but a unique asset class. While sharing fungibility and scarcity with other commodities, its price action is often related to currency movements, resulting in low correlation with the broader commodities complex. Furthermore, it holds significant liquidity, and a lack of counterparty risk, due to international standardisation of bar quality, whilst also being tangible.
Beyond finance, consistent demand from jewellery, medicine, technology, and industrial applications provides intrinsic value that can be supported during periods of economic growth. This diverse demand dynamic separates it from other similarly perceived asset classes.
The era of uncertainty
Since the early 2020s, rising geopolitical uncertainties have galvanised a broad spectrum of gold buyers. Notably, central banks have been increasing allocations, accumulating over one thousand tonnes of gold annually for the past three years, as reserves diversify away from the US dollar. This trend has been amplified by rising barriers to trade and higher tariffs, particularly those introduced by the US presidency of Donald Trump, alongside straining geopolitical alliances. This has supported increasing allocations to gold. IMF data reveals that by 2024, global gold reserve holdings reached 36,200 tonnes, constituting 20% of official reserves, a notable increase from 15% the year prior. Reflecting historical accumulation under the Bretton Woods System era, a significant concentration of gold reserves remains with the US, Germany, France, and Italy, collectively representing over half of the global reserve total.
The end to the dollar being pegged to gold meant gold could then be freely traded – akin to an Initial Public Offering.
Beyond official institutions, global investors have been increasing allocations, purchasing 1,180 tonnes in bars and coins throughout 2024, with the trend continuing into 2025, supported by market volatility and unusual risk-off movements in US yields, as foreign nations sell Treasuries in response to policy. As US debt is seeing its safe haven status tested, gold has stepped up as an alternative strategic asset that mitigates stagflation, recession risk, currency debasement, and policy uncertainty.
Investors are increasingly incorporating gold into their strategic asset allocations, driven by the strong returns it has delivered over the past couple of years, the diversification benefits previously discussed, and its robust liquidity dynamics. Furthermore, access to gold has never been greater—whether through physical holdings or gold-backed instruments such as shares, unit trusts, and exchange-traded funds. Gold continues to be an important tool for managers seeking to optimise portfolio efficiency.
In summary, from its early applications in trade, to now underpinning central bank reserves and offering a strategic asset for investors, the use of gold as an asset class has continued to morph throughout history. This underscores its importance to the global financial system: despite its absence of yield, gold is assuming an increasingly vital role in this uncertain era.
