Why Gold Remains Sri Lanka’s Time -Tested Safe Haven: Liquidity, Scarcity & Sovereign Freedom

Gold’s enduring appeal shines amid Sri Lanka’s economic volatility

✓ Holding physical gold carries zero counterparty risk, as it is no one else’s liability. Unlike bonds, corporate debt, or bank deposits, it does not depend on a financial institution’s solvency or future cash flows

✓ Gold’s liquidity ensures it can be converted to cash almost anywhere in Sri Lanka, from Colombo to Jaffna, offering a lifeline during currency devaluation, banking crises, or inflation, unlike real estate or business assets that require weeks to sell

In a nation buffeted by currency crises and rising inflation, Sri Lankans increasingly turn to gold as a reliable store of value. Beyond its cultural resonance, the metal offers liquidity, scarcity, and independence from banks, positioning it as a sanctuary amid economic turbulence and uncertainty in the local financial landscape.

In a country where economic storms have struck repeatedly over the past decade, from currency crashes and foreign reserve shortages to inflationary pressures and credit defaults, ordinary Sri Lankans search for anchors for their savings. Among all assets, gold persistently shines as a trusted sanctuary. What gives gold its almost magical status in Sri Lanka? Why is its appeal rising again now? And what should Sri Lankans know before they invest?

Gold: A Unique Financial Asset

Highly Liquid, Convertibility Almost Everywhere

One of gold’s greatest strengths is its liquidity: the ease with which it can be bought or sold at or near market price. Anywhere in Sri Lanka, from Colombo to Kandy to Jaffna, jewellers, pawnbrokers, and bullion dealers deal in gold daily. In times of stress (currency depreciation, banking crises, inflation), liquidity becomes a lifeline.

Compare that with real estate, private equity, or a small business: selling them quickly and at fair market value may take weeks or months, often at a discount.
Gold bypasses that friction.

Nobody’s Liability Zero Counterparty Risk

When you hold physical gold, you hold a real, tangible asset. It is no one else’s liability. You do not rely on a bank, insurer, or issuer to perform or pay. You don’t face default risk the way you might with bonds, corporate debt, or even bank deposits (if the institution fails).

In volatile environments, especially when financial institutions’ health is uncertain, structural robustness is invaluable.

Credit Risk-Free in the Pure Sense

Because gold doesn’t represent a promise to pay or a future claim, it carries no credit risk. You are not depending on future cash flows, revenue, or counterparty solvency. That independence is why central banks hold gold reserves as part of their foreign-exchange holdings, as a non-credit asset.

In Sri Lanka, where sovereign credit ratings and financial sector stability have sometimes come under stress, that “no-credit-risk” tag matters.

Scarcity by Nature, Finite, Hard to Dilute

Gold is inherently scarce. It must be mined at cost, refined, transported, stored, and verified. Unlike fiat currency (which central banks can print) or digital assets (which may depend on protocols or policy), gold cannot be created on a whim.

That scarcity produces a built-in resistance to devaluation. Even if governments or central banks expand the money supply, gold cannot be “diluted.” Over centuries, that has translated into a persistent capacity to preserve value, especially in inflationary or currency-weakening environments.

Historical Value Preservation, The Long View

Go back decades, even centuries: gold has repeatedly served as a store of wealth across civilisations. While its short-term price can swing, over the long run, it has held purchasing power. In many inflationary or crisis-prone settings, those who held gold saw their wealth fare far better than those who held cash.

In Sri Lanka’s own context, during periods of high inflation or rupee depreciation, many have turned to jewellery or bullion as a hedge, preserving real savings when currency-based wealth eroded.

Why Gold Is Especially Understandable & Appealing in Sri Lanka Cultural and social roots: Gold jewellery has always played a central role in weddings, dowries, and gifting. It is not just an investment instrument but is woven into social traditions, giving it deeper acceptance and circulation. Foreign reserve backing: Sri Lanka’s Central Bank holds gold alongside foreign currencies in its reserves, reinforcing confidence in gold’s macro importance. No need for financial infrastructure: Many Sri Lankans remain unbanked or distrustful of financial institutions. Gold allows direct ownership without intermediaries. Hedge against local risks: In times when the rupee weakens, external debt pressures rise, or inflation looms, gold offers a way to protect savings from those forces.

What’s Driving Gold Prices Up in Sri Lanka Right Now?

Gold’s price is set globally, but local factors amplify its movement in Sri Lanka.
Here are key drivers:

Global Trends & Safe-Haven Demand

Uncertainty from geopolitical conflicts, rising interest rates, inflation, and currency volatility drives institutional and individual demand for gold as a “flight-to-safety” asset.

Rupee Depreciation

As the Sri Lankan rupee weakens against the US dollar, imported gold becomes more expensive in local terms. Even if the global gold price were stable, the conversion effect boosts its LKR price.

Import Constraints & Supply Disruptions

Sri Lanka’s access to foreign exchange for imports is tightly constrained. Restrictions on imports, logistics bottlenecks, and global supply chain shocks reduce the domestic flow of bullion, pushing premiums higher.

Rising Local Demand

Investors, both retail and institutional, are flocking back to gold — as a hedge, as a safe store, as “insurance” against unpredictable macro forces. Even with high prices, demand remains robust.

Lower Opportunity Cost
When interest rates are low or negative in real terms (i.e. after accounting for inflation), holding non–yielding assets like gold becomes more attractive. If fixed deposits or bond yields do not keep up with inflation, gold’s relative appeal grows.

Risks & Caveats: What Sri Lankans Must Consider

No asset is perfect. For gold, especially in the Sri Lankan context, here are important risks and trade-offs:

Volatility

Gold can swing sharply in short periods. If global sentiment shifts or interest rates rise, it may see abrupt declines.

No income stream

Unlike stocks or bonds, gold doesn’t pay dividends or interest. Its return is purely via price appreciation (or depreciation).

Storage, safety & purity

Physical gold needs secure storage (bank lockers, vaults) and authentication of purity, weight and quality, especially when buying jewellery or coins.

Local premium/liquidity spread

Dealers often charge markups over global spot, especially during scarcity. When selling, you may incur a spread or discount. Liquidating large quantities may require negotiations.

Collateral risks & leverage

In Sri Lanka, finance and leasing companies have lent heavily against gold collateral (gold-backed loans) in recent years. Fitch cautions that such institutions are exposed to collateral price risk: if gold prices fall, defaults and non-performing loans (NPLs) could rise.

For example, gold-backed loan balances in Sri Lanka more than quadrupled from FY 2019 to FY 2023, raising their share of gross loans from ~4% to 18%.
Historically (e.g. 2012–13), sharp declines in gold prices in Sri Lankan markets triggered increases in NPLs for lenders heavily exposed to gold collateral.

Gold’s Role in a Balanced Sri Lankan Portfolio

Gold should not necessarily be your sole investment, but considered as a strategic component: Diversifier: Because its returns often decouple from equities, fixed income, or real estate, gold can reduce overall portfolio risk. Crisis hedge: In major systemic stress (currency collapse, financial crisis), gold may outperform many conventional assets. Long-term store: For wealth you wish to preserve over decades, gold adds resilience.

But it should be combined with productive assets, equities, cash instruments, and real assets, tuned to growth, income, and liquidity.

Conclusion

For Sri Lankans today, gold offers a near-unique set of advantages: liquidity, zero counterparty risk, scarcity, and long-term value preservation. Amid the volatility of global markets and local economic pressures, it serves not just as jewellery or culture, but as a serious financial anchor.

Yet its power comes with caveats, volatility, storage issues, local market inefficiencies, and risks of overleverage in collateralised finance. The key lies in prudent allocation, informed buying, and treating gold as part of a diversified strategy, not a silver bullet.

If Sri Lankans can combine gold’s enduring strengths with disciplinary financial planning, they may find in it both protection and opportunity, as they navigate uncertain times ahead.

Daily Mirror