Gold vs Dollar: The safe haven that wins depends on your timeframe
Reading time: 7 minutes
Since the end of February this year, the escalating conflict between the US and Iran has set off a reckoning that has elevated volatility across global markets. For regions that remain at peace, they grapple with a war on another front: economic unrest over rising energy costs.
On the day Iran blocked passage of cargo ships through the Strait of Hormuz – a narrow artery through which 20% of the world's oil supply flows – geopolitical tensions increased considerably. In many countries, citizens have been feeling the effects of rising inflation, driven largely by the risk of low oil supply and further economic instability.
This uncertainty has renewed debates between gold and the US dollar (USD) as the better safe haven. The short answer is: both, depending on your timeframe.
War and the global economy
Gold and the USD are what market participants refer to as 'safe-haven assets' – assets that investors believe hold or increase in value during uncertain market environments, such as war, recession, and market crashes.
Wars often disrupt production and cause an adverse supply shock. They are frequently inflationary and can trigger a cascade of economic outcomes. Oil is required to produce energy, feeding into major industries such as transportation, manufacturing, and food production. When oil prices rise, production and logistical costs increase, and these can be passed on to consumers, raising wage demands in the process. This is commonly referred to as second-round effects.
Nations reliant on energy imports face additional pressure, as rising fuel costs demand more USD for payment. This heightened demand strengthens the USD while simultaneously devaluing local currencies. To combat the resulting import-driven inflation, central banks typically raise interest rates to stabilise the economy.
USD as a liquidity safe haven
The USD is widely regarded as a liquidity safe haven. Because it is the world's primary reserve currency, governments and banks increase their USD reserves in times of crisis. International trade is priced in USD, debt is often denominated in USD, and global financial systems rely on USD clearing.
Unlike gold, which is a non-yielding asset, the USD is yield-bearing. It often remains strong during inflation shocks even when the US itself is a participant in the conflict, as investors move money into USD assets. Corporations also ‘dash for cash’, requiring USD to pay debts and sustain operations, and when USD is in short supply, its value climbs even higher.
At the start of the US-Iran conflict, both the USD index and spot gold (XAU/USD) rallied nearly 1%. However, through March the USD continued to outperform, gaining 2.3% by month-end while gold shed nearly 12%. This divergence was largely driven by increased inflation expectations and markets pricing in interest rate hikes from the US Federal Reserve (Fed) – conditions that favour the USD over gold in the near term.
Gold as a Store-of-value safe haven
The strength of gold as a safe haven lies in its independence from any government or financial system; it has no issuer and carries no counterparty risk. The USD depends on the US government and the Fed, while gold is a universally recognised asset that does not default or lose relevance even when trust in institutions erodes.
The World Gold Council (WGC) notes that gold has consistently maintained its position as a reliable safe haven across a wide range of stress events, including geopolitical tension and supply disruptions. Its relatively low volatility in such scenarios can make it a stronger long-term choice than the USD.
The power of gold in long-term critical conditions
The USD's safe-haven status is conditional – it depends on the nature of the shock and the state of the global economy at the time. As seen during the Covid-19 pandemic, when trillions in offshore liabilities denominated in USD triggered a sudden USD shortage, the currency surged in the acute phase of the crisis. This is consistent with what VIX-measured volatility spikes tend to show: the USD outperforms when fear is at its peak.
Gold, by contrast, often underperforms in that same acute phase. As investors rush to raise cash, even gold gets liquidated. Rising inflation fears push bond yields higher, which weighs on a non-yielding asset like gold in the short run.
However, as the months pass and the acute shock subsides, gold's role as a store of value reasserts itself. Free from the policy decisions and interest rate cycles that influence the USD, gold tends to appreciate steadily as uncertainty lingers and confidence in paper currencies wavers.
The bottom line
In the short term, the USD wins. It is the world's go-to currency in a crisis, supported by liquidity demand, rate hike expectations, and its reserve currency status. But over a longer horizon, gold's independence from government policy and its universal acceptance make it the more resilient store of value. The haven that works best for you ultimately depends on how long you plan to hold it.
