Rising uncertainty over trade wars and de-dollarisation are pushing up global demand for gold — its supply is limited: Campbell R. Harvey

Time of India

05-06-2025

Campbell R. Harvey explains gold's enduring value, citing its historical stability from ancient times to today. He notes that the financialization of gold through ETFs and geopolitical factors like de-dollarization influence its price. While volatile in the short term, gold serves as a long-term store of value and a potential hedge against stock market downturns, offering portfolio diversification.
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Campbell R. Harvey is Professor of Finance at the Fuqua School of Business, Duke University. Speaking to Srijana Mitra Das, he discusses the value of gold — through the ages:A. Part of my work looks at gold historically and why this is so valuable now. Gold has a very long track record which spans millennia. It's easy to work with because it's a soft metal. It doesn't tarnish — it keeps its lustre and it has artistic worth. Also, gold has held its value through time. I tell two stories about that — one is the cost of a loaf of bread in Nebuchadnezzar's time around 2,500 years ago. There is historical data on how many loaves you could buy for an ounce of gold then. If you convert that to today's prices, it's about $7 a loaf — that's what I pay at my artisanal bakery now.The other story dates from Roman times almost 2,000 years ago in Emperor Augustus' reign. There is data on how much Roman centurions were paid in gold as well as the coins themselves to discern the gold's purity — what Roman centurions were paid in gold 2,000 years ago would cover the wage of an army captain in the US today. That means gold has held its value over the long term.A. Yes. In recent years, the first driver has been the financialisation of gold — physical gold is awkward to store. People who might have wanted it in their portfolio didn't want to take the risk of buying the actual metal. Exchange-Traded Funds (ETFs) were introduced in the United States in 2004 — that made it possible for the average investor to hold gold at 25 to 40 basis points a year, with the ETF provider taking care of storage. Institutional investors who didn't want to bother with warehousing bullion could do the same thing — hence, the price of gold increased. Previously, demand was unfulfilled because of institutional constraints — suddenly, those were broken and the price rose. Another force is what I call 'de-dollarisation' or the 'weaponisation' of the US dollar, particularly against Russia in terms of sanctions which have meant Russian entities being banned from the SWIFT system for transfer in 2022.The US could do this, being the reserve currency of the world. I think certain countries — in particular, China — took note of that. The 'weaponisation' of the dollar spurred a move to be independent of it. Hence, the idea of 'de-dollarisation' with China taking actions consistent with that. One step towards doing this is to bolster the credibility of your own currency — to have gold in reserve does this and China's been a buyer.Today, there is heightened uncertainty, given the potential for a trade war. In such times, people tend to increase their allocation to safe assets — gold is in that group. Another issue is a perception that the United States might not be the safe haven it was 10 or 20 years ago. When the US dollar suddenly becomes riskier and Moody's downgrades the US credit rating, some countries start thinking,'We need to diversify our reserve holdings and reduce dollar exposure.' So, you sell bonds — however, you need to replace them with something else. Gold is an option. This isn't just central banks — when uncertainty grows, institutional investors increase safe assets like gold.Now, consider supply and demand dynamics — gold's supply is very sticky, being a combination of mining and re-cycling. Mining supply doesn't move much. Even though gold's price has risen dramatically in recent years, actual mining supply has essentially stayed the same. It's hard to ramp up supply — opening a new mine takes years. Hence, gold prices are very sensitive to shifts in demand.A. Gold holds its value over the long term. I quoted two examples about that, one from 2,000 years ago and one from 2,500 years ago. Historically, gold has held its value over a very long horizon. That's not very relevant for most investors with a much shorter horizon though — and gold is an unreliable inflation hedge over shorter horizons. Its volatility is approximately the same as the S&P 500.If we look over the last 20 years, gold has more than held its value — it's actually gained in inflation-adjusted value. But if you look at the 20 years before that, gold underperformed inflation — it did not hold its value. The longer the horizon historically, the better gold is in terms of a hedge. However, gold's risk should also be measured by how it interacts with other assets in your portfolio. It turns out gold historically is uncorrelated with the stock market.That makes it an attractive hedging property. In my research, I've looked at the last 11 major drawdowns in the S&P 500 — each had very large negative returns for the stock market. Gold, in 8 out of 11 situations, provided a positive return. In three, it was negative but that number was small. Gold could actually act to reduce a portfolio's risk — but, given its volatility, sometimes it'll work, sometimes, it won't, as the historical data shows us.Views expressed are personal