Gold is often treated as the ultimate crisis hedge. Yet in practice it does not always behave that way.
Earlier in my career I traded gold at the South African Reserve Bank. I remember how prices moved during defining moments such as the Rubicon speech in the mid-1980s and other episodes of political and economic uncertainty, moments when the rand weakened sharply and gold became one of the few assets local investors trusted. Those experiences shaped how I think about gold today and why I remain sceptical of the simple narratives surrounding it.
Gold does deserve a place in some portfolios, but not always for the reasons investors assume. Its traditional appeal rests on two characteristics. First, gold often behaves differently from equities and bonds, making it a useful diversifier. Second, it sits somewhat outside the modern financial system. Unlike fiat currencies, it cannot be printed by central banks, and unlike corporate securities it carries no exposure to earnings or economic growth.
For these reasons gold has historically performed well when confidence in monetary systems weakens. It also benefits when real interest rates fall, when the opportunity cost of holding a non-yielding asset decline, making gold more attractive. Seen through this lens, gold is less a hedge against every market shock than a hedge against monetary uncertainty — what investors sometimes call regime risk.
However, this is also where the popular narrative about gold begins to break down. The assumption is that whenever the world becomes more dangerous or uncertain, gold rises. Markets rarely behave that neatly.
First, gold does not operate in isolation; it competes with other safe havens. In periods of stress, capital flows towards the deepest and most liquid markets, which still means the dollar and US treasuries. Currencies such as the Swiss franc can attract similar flows.
In practice, it is usually the dollar that rises first. Because gold is priced in dollars, these dynamics matter. When the dollar strengthens, gold becomes more expensive for international buyers and demand can weaken. In many crises the dollar, not gold, becomes the dominant safe haven.
When tensions between the US, Israel and Iran escalated, gold initially rose about 5%. However, the rally quickly reversed as the conflict intensified, while the dollar strengthened and drew capital into US assets.
Second, liquidity — something investors often take for granted — can become a constraint during real disruptions. Dubai, one of the world’s key bullion trading hubs, recently saw physical gold trade at discounts of up to $30 per ounce to the London benchmark during the escalation in the Middle East. The reason was logistical: airspace closures disrupted shipments, raising transport costs and forcing traders to discount inventory.
Third, the gold price is also shaped by actors whose behaviour is difficult to predict. Central banks have been major buyers in recent years as they diversify reserves away from the dollar. Retail investors, particularly in China, have also become a powerful force, amplifying rallies and reversals.
Inherent volatility
Volatility is therefore an inherent feature of gold investing. Prices have risen sharply over the past year, yet daily moves of several percentage points have been common. This volatility can create opportunities but it can also increase portfolio fluctuations more than investors expect.
Gold’s role in portfolios is therefore narrower than often assumed, but still valuable. It tends to perform best during periods of monetary stress: when real interest rates fall, when confidence in currencies weakens, or when traditional diversification between stocks and bonds becomes less reliable.
For investors the implication is straightforward. Gold should be understood primarily as a diversifier against monetary instability, not as automatic insurance against geopolitical shocks. Gold is not insurance against every crisis — it is insurance against the rarer moments when confidence in money itself begins to falter.
Dr Marais is chair of Carmel Wealth & Wealth Associates.
