Wild swings in gold price shatter the ‘safe haven’ illusion

Gold has long enjoyed a reputation as a financial “safe haven” during stormy times. But over the past few months of geopolitical chaos and market panic, the precious metal has moved more like a roller coaster than a steady ship at anchor.

In late January, the gold price surged to an all-time high near US$5,600 per ounce – effectively double what it was a year earlier. It’s lost about 20% since then, sliding sharply while major conflict broke out in West Asia.

To be clear, gold is still at lofty heights by historical standards, up almost 300% over the past decade. Much of this surge has been driven by “financialisation”.

Put simply, more ways of investing in gold on paper – with complex financial products called derivatives and funds that track its price – have seen a boom in speculation by institutional and retail investors.

But this year’s wild swings in price should shatter any remaining illusion that gold is always a safe haven. To understand why, we need to look at how modern financial markets work – and in particular, why an oil shock is different...

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