Gold as a safe haven in geopolitical crises

Gold has been the subject of intense trading and the movement of financial assets for centuries and has been used by humanity since 3000 BC as a currency, but it was only recognised as a universal monetary resource from 1750 onwards, with the intense exploitation of gold in Brazil and Africa. It is estimated from historical records that more than 160,000 tonnes of gold have been mined in the last 5 ,000 years, of which around 112,000 tonnes have been mined in the 1800s alone, according to the World Gold Council (WGC, In Gold We Trust, 2018).

The milestones of gold production in the world are, in chronological order, the discovery of the mines of Peru and Mexico by the Spanish, the gold of Minas Gerais by the Portuguese and, secondly, the advance of hydraulic dismantling and dynamites between the 19th and 20th centuries, which significantly increased production in the United States, Australia and South Africa.

The world's reserves are around 54,000 tonnes, with the countries holding the largest shares being South Africa, Russia, Australia and the United States, in the respective order of importance, while the largest producers are, in descending order , China, Australia, Russia, the United States and South Africa, according to the United States Geological Survey's Mineral Summary 2019

It is estimated that more than half of the world's gold production is used for bank reserves as a guarantee of balance in international trade transactions. The other economic applications of this commodity are limited to its use as a raw material for the aerospace and electronic components industries, dentistry and jewellery.

The reason for the metal's most recent rise was the growing tension between the United States and Iran, after US President Donald Trump authorised an airstrike by the US armed forces on January 3, which killed General Qassem Soleimani, leader of the foreign wing of Iran's Islamic Revolutionary Guard Corps.

On 5 January, the Iraqi parliament passed a resolution expelling US troops from the country. Since then, Trump has threatened Iraq with sanctions.

With Iranian authorities promising retaliation to the US offensive, investors are still trying to assess the final consequences of Soleimani's death for regional and global geopolitical stability in one of the world's most important oil production and transport zones.

On the 6th, Goldman Sachs analysts wrote in a report to clients that, in episodes of geopolitical tensions of this nature, buying gold is more effective portfolio protection than holding positions in oil.

However, there is a perception among investors and analysts that the escalating tension between the US and Iran is easing, reducing fears in the market.

The investment is best suited to investors who already have funds distributed in other financial products, i.e. have a diversified investment portfolio. Gold preserves wealth and offsets the risk of other assets, such as company shares.

In the case of individual investors, gold is only suitable if they have the sensitivity to understand market movements. Small investors need to be aware of the market in order to enter when it's cheap and take advantage of times of crisis to sell.

There are direct and indirect ways to bet on gold as an investment, the most common and advisable of which are:

• Physical gold
• Contracts on the BM&FBovespa
• Investment funds

To buy physical gold (in bars) you need to look for a financial institution that sells the product, register and prove your income for purchases over R$10,000.00. In addition, you need to find a custodian bank, i.e. one that will store the gold and pay a monthly custody fee on the financial volume held, which can vary from 0.07% to 0.15%.

Another option for physical purchases is to negotiate directly with a gold distributor and keep custody at home. It's important to note that in this case the risk of losing the asset is greater, since it would not be held within a financial institution that provides security and insurance for assets in custody.

One of the disadvantages of this form of investment is that it is less liquid at the time of sale and it is more difficult to find a counterparty willing to buy at the market price.

For this option, investors need to look for a financial institution registered with the BM&F Bovespa (brokerage house or their own bank).

Fractional contracts of 0.225g to 10g or full contracts of 250g are traded. Under this system, in addition to greater liquidity for buying and selling, the investor only pays the brokerage fee for trading, while custody is the responsibility of the broker.

In this type of trading , investment in gold is similar to investment in variable income and, like income tax on shares, is exempt from income tax for investments of less than R$20,000.00.

Investment funds are the most accessible option for most investors, as you don't have to worry about the bureaucracy of buying gold in cash or the intricacies of the futures market.

With gold investment funds, you outsource the management of this asset to a professional manager. The fund can be either passive, which buys gold and simply suffers the price variations, or active, which buys and sells gold according to the market momentum, seeking higher returns.

The value of gold can change at any time, depending on various factors. So it' s not a guarantee that you'll get a high return, just that it's not subject to the same changes as ordinary currencies. Here are some of the factors that can change the value of gold:

• Monetary policy in different countries;
• Supply and demand from investors on stock exchanges around the world;
• Imports and exports of metal between countries;
• Seasonality throughout the year;
• Natural factors that affect the extraction of gold.