Much more than a safe haven: what drives the gold price in the long term

Gold has always been regarded as a safe haven and store of value in uncertain times, and this year’s developments once again confirm its reputation. The extraordinary performance of the precious metal in 2024 is first and foremost due to the prevailing geopolitical crises and current events such as the US elections in November, but to a lesser extent also to other factors such as inflation and central banks’ interest rate decisions. Regarded over longer periods, say since the liberalisation of the gold price following the abandonment of the Bretton Woods system in 1971, gold is cast into a different light.

Contribution of gold to portfolio performance often underestimated

The fact that the addition of gold can improve the risk-adjusted return of an investor portfolio and reduce the volatility of a typical equity/bond portfolio has been sufficiently proven by studies such as the recent ‘Gold as an Asset Class for Institutional Investors’ by Mercer in 2024. Far less research has been conducted regarding the extent to which gold can contribute to the overall performance of a portfolio, and existing studies often fail to take important factors into account. According to the World Gold Council, for example, the years in which gold prices were fixed are frequently included when analysing the long-term performance of gold. Furthermore, the dual role of gold as both an investment asset and commodity is often insufficiently considered.

Global economy is the main long-term driver of gold price

The recent study ‘Gold’s long-term expected return’ by the World Gold Council comes to the conclusion that, over a very long period, global economic growth has a significantly higher impact on the development of the gold price than inflation and crisis situations. What is more, the gold price has largely developed alongside global GDP over the last 53 years but has, in fact, outperformed it. Annually, global GDP was up by an average of 7.8 per cent since 1971 while the gold price rose by 8.0 per cent. Based on the example of the US consumer price index (CPI), the study also shows that gold has significantly outperformed its role as an inflation hedge and store of value over this long period: the CPI has only risen by an average of 3.9 per cent annually.