Gold, the shiny stepchild of the financial world

The untidy drawers of the financial system

Even if the financial markets appear peaceful at first glance, there are still the untidy drawers full of macroeconomic problems. Banking crises, inflation, wars and geopolitical tensions are like lava under a dormant volcano just waiting to come to life. In this confusion, gold is like the rock in the surf, the reliable superhero who is always there when you need him most.

Central banks: The secret gold lovers and their preference for the shiny stepchild

The secret gold lovers – the central banks. Yes, you heard right. It is the very institutions responsible for our monetary policy that are developing a steadily growing weakness for the shiny stepchild called gold. Like industrious squirrels stocking up on nuts for the winter, central banks around the world are collecting gold reserves. In doing so, they not only diversify their assets, but also protect themselves against potential financial storms and geopolitical uncertainties.

But why are central banks so fascinated by gold? The answer lies in its historical role as a universal medium of exchange and store of value. Gold serves as an effective tool for risk management and portfolio diversification. As a physical asset, it is immune to cyber attacks and system failures that could threaten digital assets. In addition, gold is free from the credit risks associated with government bonds and its performance generally does not correlate with equities and bonds. This makes gold fundamentally attractive to anyone who wants to minimize their financial risks – including central banks.

The silent but continuous increase in gold reserves in the vaults of central banks illustrates the importance of the precious metal in the global financial system. Central banks such as the Russian Federation, Turkey and the People’s Republic of China have acquired considerable quantities of gold in recent years, thereby reducing their dependence on the US dollar. This discreet demand for gold shows that the shiny stepchild is still valued as an important asset despite its often overlooked role.

The central banks’ affection for gold makes it clear that the precious metal is and remains an essential pillar of the global financial system. In a world characterized by changing geopolitical and economic conditions, gold retains its role as a reliable and stable asset – and not just for central banks.

Gold and the S&P 500: The unequal siblings

Let’s also take a closer look at gold and the S&P 500 equity index – the unlikely siblings in the uptrend. The S&P 500 is undoubtedly the darling of the US equity indices, while gold is often overshadowed. However, like unequal siblings who nevertheless support and complement each other, gold is showing a remarkable upward trend in relation to the S&P 500.

In times of heightened volatility, political uncertainty and economic change, the precious metal has in many cases proved to be a kind of calming influence that can cushion the impact of fluctuations in the stock market. While the S&P 500 is influenced by the performance of the largest listed companies in the US, gold is less susceptible to the daily ups and downs of the stock markets. This means that gold plays an important role in a balanced portfolio by providing stability and a lower correlation to equities.

It is also worth noting that in some cases, gold can even benefit from negative events that hurt the stock markets. In times of interest rate hikes, geopolitical tensions or currency crises, gold can act as a safe haven and offer investors protection while the S&P 500 may lose value.

Overall, gold’s upward trend shows that investors are increasingly recognizing the potential of the shiny stepchild and adding it to their portfolios. The two dissimilar siblings complement each other very well by combining the advantages of equity investments with the security and stability of gold. Investors can thus benefit both from the long-term performance of the S&P 500 and from the crisis resistance that gold has to offer.

For which investors does gold make sense?

It remains undisputed that equities are the most attractive asset class in the long term. However, the markets show time and again that they can also be unpredictable. For investors who are less able to cope with increased price fluctuations in their investments, gold offers an important stabilizing element. As a shining knight in shining armor, gold helps to cushion the turbulence in a portfolio.

For this reason, gold should be considered an indispensable component of a balanced portfolio. It offers protection against inflation, geopolitical uncertainties and other macroeconomic risks, while at the same time providing stability and diversification. Investors looking for a solid and reliable investment should therefore not hesitate to give the shiny stepchild a place in their portfolio.

With this in mind, the shiny stepchild “gold” has definitely earned its place in the financial world.

Yours, Mark Stock©

Mark Stock is a member of the Point Capital editorial team. “I am a stock market enthusiast and am passionate about economic history. I have been following the ups and downs of the markets for years and, of course, invest myself – preferably in shares. So my name says it all. Every month, I take up what I consider to be an exciting topic. And since the focus is on the content and not on me personally, I write under a pseudonym.”