The price of any commodity should reflect its demand and the real economic value it represents. Recently, the price of an ounce of gold has risen to unprecedented levels. Does this indicate an increased global demand? Fundamentally, what drives the price of an ounce is demand, as supply is limited. Why does demand rise? Indeed, political and security situations are the main cause. The two most important political events are the Gaza war, with all its political, security, humanitarian, and criminal implications, and the Ukraine war, with its dangerous geopolitical factors on both European and international levels. Added to this are the fluctuations in various American policies that strain international investment conditions. The world is anxious, the international business sector is confused, and suitable investment opportunities are unclear. The result is a rise in the price of gold.

Every economy goes through normal successive phases of prosperity and slowdown, known as the economic cycle. Each phase can shorten or lengthen depending on the internal and external conditions of the concerned economy. The anxiety caused by the transition of the economy from one phase to another drives economic agents to seek what can protect them from the drawbacks of economic crises. For centuries, gold has occupied this position as a refuge that all production parties turn to. People have brought the yellow metal in its various forms into their homes as a form of savings to face dark days. Countries have purchased gold and made it a primary monetary reserve supporting the exchange rate of national currencies.

The monetary system prevalent in the 19th century and early 20th century linked currency exchange rates to a fixed quantity of gold, thus giving the yellow metal a significant monetary role. The monetary system established by the “Bretton Woods Conference” after World War II linked the US dollar to gold at a fixed exchange rate and made international currencies fluctuate relative to the US dollar, which contributed to price stability for many years and encouraged everyone to acquire gold. Bretton Woods collapsed only due to the weakness of the dollar at that time and the rush of everyone to exchange it for gold through the US central bank offices. Historically, gold has not been able to maintain its nominal value, so how can it maintain its real price, especially since it does not provide income to its owners?

The study on gold published by the US central bank re-examined the feasibility of investing in it and encouraged central banks to sell part of their gold reserves.

What to do? Industrial countries with strong institutions and effective administrations can supervise the process of liquidating gold and benefiting from it. As for developing countries, most of them do not enjoy sound, effective, and transparent administrations, so they must be cautious before liquidating their gold, which exposes it to spending and waste. Keeping gold as gold in developing countries, regardless of changes in its ounce price, remains the best conservative policy relative to their economic and administrative conditions. As for individual investment, it is better to diversify assets among cash, metals, financial instruments, real estate, and others to protect oneself rather than necessarily achieve large profits that may not materialize.

* Lebanese Author