The days of navigating treacherous paths through the Rocky Mountains in search of a rich vein of the glittery good stuff might be over. But gold rushes still occur — and we’re in one right now.
As war, ideology and protectionism divide the world into distinct blocs, developing countries in particular are hoarding bullion to prepare for the day when a global financial system dominated by the U.S. and Europe collapses, and a new one can take its place.
That secular trend, which began a decade ago, has been turbocharged this year by more short-term factors, particularly the downward turn in world interest rates. As a result, prices have marched from one record high to another, closing above $2,800 an ounce for the first time ever last week. This year alone, gold is up 35 percent, well ahead of the 20 percent rise in U.S. stocks and more than double what any European stock index can boast. Goldman Sachs’s Lina Thomas sees it breaching $3,000 by the end of next year.
At the heart of the rally are central banks, particularly those who either are — or fear they could be in the future —on the receiving end of U.S. sanctions. China has bought 316 tons since the start of the Ukraine war. Russia has also been a big buyer, as have central banks in the Middle East, Central Asia and India.
More recently, buying has been dominated by two countries whose histories and recent experiences have sensitized them to geopolitical risk: Poland and Hungary. Poland has long wanted to boost gold to 20 percent of its official reserves, but the National Bank of Hungary resumed purchases for the first time in three years in September, saying: “Amid increasing uncertainty … the role of gold as a safe-haven asset and a store of value is of particular importance, as it enhances confidence in the country and supports financial stability.”
Other officials put it more bluntly.
“It’s a sign of impending wars,” lamented one European central banker, granted anonymity to indulge a brief lapse into alarmism.
Nor is it just about the fear of hostilities and sanctions, but also the failing reliability of the states that built the postwar global financial order. Both the U.S. and Europe are laboring under growing debt burdens that look unsustainable in the long term, as the International Monetary Fund highlighted at its annual meeting. With U.S. debt now at 124 percent of GDP and rising fast, Goldman’s Thomas noted, “many central banks have the bulk of their reserves in U.S. Treasury bonds, and policymakers may be increasingly concerned about their exposure to fiscal risks in the U.S.”
That has incalculable consequences for a developing world that has long resented what it sees as financial bullying, noted TS Lombard analyst Davide Oneglia.
The idea is “to slowly diversify international reserves away from what remains very large holdings of dollar-based assets,” said Mohamed El-Erian, former boss of bond trading giant Pimco. The dollar still accounts for around 58 percent of the world’s foreign exchange reserves, making it all-but indispensable for any kind of cross-border trade, but that is down from around 65 percent only a decade ago.
And gold’s neutrality and immutability make it a suitable anchor for a parallel financial system still being built: one that the U.S. will not be able to dominate or manipulate.
Slow awakening
Western policymakers have only slowly woken up to the risk.
Speaking in Washington at the IMF’s annual meeting in October, European Central Bank President Christine Lagarde noted that “China has been buying gold like never before” and muttered darkly about attempts to “push other currencies” around.
“The role of a currency should never be taken for granted,” she warned.
However, once back in Europe, she sounded more relaxed, telling Le Monde last week that the dollar wouldn’t be dethroned in her lifetime. That may in part be due to evidence from last month’s summit of the so-called BRICS+, a loose grouping of emerging powers marshalled by China and Russia. While BRICS meetings have often generated explicitly anti-dollar rhetoric, the latest summit’s communiqué focused on the evils of U.S. sanctions but otherwise threw its weight behind reforming existing institutions such as the IMF.
“While these are … distinct efforts,” El-Erian said, “they can serve to come together in slowly eroding the absolute dominance of the dollar and of the dollar-payments system.”
On the bandwagon
It will be a long re-balancing. While advanced economies hold as much as 70 percent of their reserves in gold, BRICS central banks typically hold around 10 percent, with most of the rest in dollars. That means that they are likely to stay gold buyers in the long term even if — as is currently the case with the People’s Bank of China — they can hold off when they think prices have gone too far.
But the world’s private investors, as so often, are second-guessing them and jumping on the bandwagon.
Traditionally, gold prices have been correlated to central bank interest rates. When the returns on savings and bonds have gone up, as they have since 2022, gold has typically moved in the opposite direction because it offers no returns. But this time appears to be different. Gold prices rose throughout most of the period when central banks were raising rates — and they’ve risen even faster as the Federal Reserve and European Central Bank have started to cut.
“Traditionally we wouldn’t have really taken any notice of it,” said David Wilson, director of commodity strategy at French bank BNP Paribas. “But it’s obvious that central bank activity has fed through to the psyche of speculative investors. If they’re seeing central banks buying gold, they say ‘we should be buying too’.”
According to data compiled by the U.S. Commodity Futures Trading Commission, the net amount of gold futures held by market participants — a rough proxy for investor buying — has more than tripled in the last 12 months, even though — as BNP’s Wilson noted — central bank buying has clearly eased off this year. Net speculative interest now stands only just below the record level seen at the start of the pandemic.
‘The last resource’
As in the past, the current scramble for gold suggests a heightened desire for reliability amid uncertainty and fading trust in institutions, analysts say.
“In times of crisis people flock to gold,” said Krishan Gopaul, senior analyst at the World Gold Council. “It’s a global asset that people value, and they know it will be accepted by others.”
And that value increases in parallel with doubts about the value of other assets, even the almighty dollar.
“Gold has been a symbol of trust for 3,000 years,” said Salvatore Rossi, a historian and former deputy governor of the Bank of Italy. “Gold bars for central banks are like grandpa’s old gold watch for a family: it’s the last resource, the one you would not sell, but everyone knows that you have it.”
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