Gold the Golden Safe Haven from Sovereign Stupidity.
The Golden Explosion: How Long Can It Last?
Other day, I was telling my niece about What led India to Pledge its Gold?
Our political turmoil had often diverted attention from economic challenges, sparking a slow foreign exchange crisis in 1980s. Then, the Gulf War erupted in 1990, driving crude oil prices sharply higher. As a result, oil import expenses surged, exports fell, credit became scarce, and foreign investors pulled out their funds. The crisis deepened until the foreign exchange reserves shrank to cover just 2 weeks of imports, well below the recommended safety threshold of 26 weeks( at the time). With the World Bank and the IMF refusing to offer financial relief, we were left with two stark options: pledge its gold reserves or default on its sovereign debt obligations.
But why, Gold is so important?
The New Case for Gold by James Rickards is an interesting read. He makes the case that gold remains relevant in modern economies, particularly as a safeguard against inflation, currency devaluation, and systemic risks posed by overreliance on fiat currencies. Also for fragile financial systems -especially in an era of potential monetary chaos driven by excessive debt, central bank policies, and geopolitical tensions.
Few weeks back, I wrote about an economist, I loved to read. Let me quote one more of his famous saying,
"Money is a matter of functions four: a medium, a measure, a standard, a store" - William Stanley Jevons
Gold can act as a medium of exchange. Gold serves as the measuring rod against which the value of currencies can be measured. Gold can act as a universal standard of value. And, Gold is a store of wealth par excellence.
In a World of Uncertainty, Why Gold?
So, why we love Gold so much or rather what make Gold a powerful hedge against economic mismanagement.
High Stock-to-Flow Ratio: Gold has a high stock-to-flow ratio, differentiating it from commodities (which are consumed, while gold is hoarded). Gold's annual production is low relative to its stock, creating trust, stability and universal acceptance.
Intrinsic Value: Gold’s supply is finite, and it cannot be “printed” or manipulated like paper money. While central banks can influence their currencies through measures like quantitative easing or interest rate adjustments, gold remains unaffected. Its value is driven by global supply and demand dynamics, not by the policies of any single authority.
Portability and Durability: Gold is easily divisible into standardised units and is negotiable and easily transportable. It is also durable and practically indestructible. Gold is an element that comes in only one form and does not chemically combine with other elements. It does not tarnish or rust. It is highly malleable and can be pounded with hand tools into thin foils and then back into lumps. It is easy to melt and can be subdivided indefinitely.
Deflationary periods usually lead to a decline in confidence in financial systems and paper currencies, increasing gold's importance and leading to remonetisation. Gold is hoarded as a manifestation of a stronger desire for safety.
Historical Context: Gold has maintained its purchasing power over long periods and has never become worthless. For most of the past three millennia, the world’s commercial centres have used a variant of the gold standard. Gold has been adopted as money because it works, and it has defeated every challenger.
Independence from Currency: Gold is not tied to any specific currency, which can be expanded at will. Fiat money is accepted by nobody in extremis, whereas gold is always accepted. Because of its independence, trust in gold comes from past experience of monetary stability.
The Case for Gold in Light of Sovereign Stupidities
Historically, Gold has been a force of creation and destruction. It’s allure has shaped civilizations (rise of Athens to financial prominence was partially assisted by its splendid coinage), devastated economies, dictated the destinies of rulers (Spanish Conquests in the Americas was driven by greed for gold), fueled artistic brilliance, and tragically, incited acts of profound cruelty.
The gold standard helped to sustain the British Empire. The British monetary system was devised to take full advantage of new sources of gold supply (even the KGF in India), connecting continents through steamships, telegraph, and cable, largely financed by British capital.
"Sovereign stupidities" refers to policy errors made by governments, arising from flawed economic theories, manipulation of markets, or a failure to learn from history (rush for gold in the early 1930s led to the collapse of gold-based monetary systems).
So, when policies misfire or central banks falter, gold often shines as a tangible, decentralized store of value that isn’t beholden to bureaucratic whims or printing presses.
Common examples are Excessive sovereign debt issuance, Currency manipulation (like the current Rupee Defense act by RBI), Currency devaluation (like what we did in 1966, read this to know more about that event), Inflation, and in general any Economic Worries and Crisis.
Gold in 2025: Will the Rally Continue?
Gold’s 2024 run—up over 25% to around $2,700 per ounce (oz) by late last year—has been fueled by rate-cut hopes, a weaker dollar, and geopolitical jitters. J.P. Morgan Research forecasts gold prices to rise towards $3,000/oz in 2025, with a 4Q25 quarterly average of $2,950/oz.
A ceasefire in the Middle East and tentative steps toward a ceasefire in Ukraine could indeed ease the demand for safe-haven assets, such as gold, by reducing immediate geopolitical risks. However, the uncertainty surrounding US tariffs introduces a counterbalancing factor that could sustain or even increase investor interest in these assets.
Tariffs President Trump's focus on tariffs and rising trade tensions between the U.S. and China. A universal tariff scenario could supercharge the broad price effects for precious metals. Uncertainty over trade and tariffs will continue to buoy gold prices.
Further Central bank purchases: Central banks aren’t done with gold yet, with added political uncertainty likely helping to stoke a revival into 2025. Under a disruptive macro scenario, central bank purchases, particularly from China, could be a source of stronger demand in 2025.
Another "Elephant in the room" is Investor interest in ETFs In the event of a more benign macro environment in 2025 that refocuses attention on a Fed cutting cycle, further inflows into gold Exchange Traded Funds (ETFs) are likely, as the attractiveness of money market funds wane. Gold ETF holdings will likely hold the key to higher prices under this scenario. If we see more ETF additions, perhaps driven by geopolitical uncertainty, optimism about further US rate cuts and/or a stronger gold performance, this would give bullion prices a further tailwind.
Is there any Counterarguments?
"In investing, what is comfortable is rarely profitable." - Robert Arnott
While investor and safe-haven buying continues so can the price rally, but a correction is looking increasingly likely. Lets see this,
A historical analysis of gold prices since the 1970s reveals that the current divergence between gold's price and its 200-day moving average is unusually large. This pattern, seen in 1980, 2011, and 2020, has invariably signaled the onset of extended bear markets for gold, following periods of explosive growth.
Although investor and safe-haven buying is sustaining the price rally, the chances of a correction are becoming increasingly significant. Also, if industrial metals like silver keep trending with economic growth, gold’s safe-haven premium might wane short-term. But prices can rebound if fresh catalysts—like U.S. debt flirting with $36 trillion, a dollar drop or renewed inflation fears — can keep the long-term case alive.
Then the Speculators might also Spoil the Party?
Speculators, particularly those holding long positions in gold futures, play a significant role in driving price movements. When they start unwinding—or selling off—these positions, it often signals a shift in market sentiment. Afterall Gold’s rapid rise might have stretched prices too far, too fast.
I guess right time to put some money into Gold was second-half of 2024, but you never know. Since, I would like to conclude this as
Gold thrives on uncertainty, but recent developments—like a stronger U.S. dollar (up 5% recently) or easing geopolitical tensions (e.g., fragile ceasefires)—might reduce its safe-haven appeal, encouraging speculators to exit.
“Don't Gain The World & Lose Your Soul, Wisdom Is Better Than Silver Or Gold.”
― Bob Marley