What is really fueling the new gold rush?
Gold has been making headlines in the financial press for quite some time now, thanks to its stellar performance. Since October 2023, the price of gold has been making robust gains, hitting an all-time high of $2,480 per ounce on July 17. This is a significant jump from its previous record of $2,075, set in August 2020, amid the pandemic-induced uncertainty and consequent safe-haven demand.
Of course, this is hardly surprising, given recent geopolitical turbulence. There are two active wars – in Ukraine and the Middle East – and either (or both) could escalate at any moment into a wider international conflict. Meanwhile, immensely influential elections are taking place this year: in India, the United Kingdom and the European Union incumbents lost clout, Mexico has a new leader with the same leftist program, and the unpredictable November presidential election in the United States is drawing closer. Sociopolitical tensions, deep ideological divisions and dangerous polarization are becoming the norm worldwide.
On top of all that, the gradual control of inflation is providing modest comfort, but easy monetary policy is a long way off. While price pressures have retreated from the near-double-digit highs we witnessed in several advanced economies over the last couple of years, there is still considerable pressure on countless households and businesses. It will likely again rear its ugly head as governments consider raising taxes to pretend to address gaping fiscal deficits. These problems become more apparent and palpably more urgent when one takes into account the divergence between real inflation and official consumer price index (CPI) data, a profoundly misleading discrepancy examined and demonstrated in a previous analysis.
The demand fueling these new record highs was coming from somewhere else – national banks.
In this context, gold’s gains are entirely unsurprising. The metal is performing exactly how one would expect it to in such an environment. When doubt and uncertainty reign supreme, investors flock to the safest of safe havens – in dark and unsettling times, that’s when gold reliably and predictably shines its brightest.
Not all is as is seems
There is, however, a plot twist. Since the beginning of the year, even as prices were climbing from one record high to the next, numerous gold dealers in Europe were simultaneously reporting that retail investors’ purchases were becoming few and far between, yet selling activity was actually picking up. Sure enough, official data confirmed the anecdotal reports: Retail demand was indeed decisively falling, while the gold price kept rising.
Of course, neither the timing of these purchases nor their scale is a coincidence.
The demand fueling these new record highs was coming from somewhere else – national banks. Central bank purchases have been a key driver of gold’s price surge, which is interesting in and of itself, given the general disdain that so many central bank officials and policymakers have historically shown towards the metal. However, there is something even more interesting and much more widely and deeply consequential at play here if one takes a more detailed look at the specific central banks behind this buying spree.
According to the World Gold Council, the central banks that were the most active in purchasing gold in the first quarter of 2024 were the People’s Bank of China, which added 27 tons to its gold reserves; the Central Bank of Turkey, which increased its holdings by over 30 tons; the Reserve Bank of India, which bought 19 tons; and the National Bank of Kazakhstan, which added 16 tons.
Facts & figures
Of course, neither the timing of these purchases nor their scale is a coincidence. This voracious buying didn’t just come out of nowhere. China has been expanding its reserves with fresh purchases every single month since October 2022, pausing only this spring, and it is expected to resume as soon as price levels pull back. While it is notoriously hard to obtain accurate economic data from the country, according to official reports, gold now accounts for 4.9 percent of China’s total foreign exchange reserves, a notable jump from the 2.3 percent it represented in 2019, just ahead of the pandemic and ensuing chaos.
Russia also aggressively increased its gold reserves during that time, with the yellow metal now constituting over 29 percent of Moscow’s total reserves, a huge leap from the 11.8 percent it comprised six years ago. Other nations within the Sino-Russian sphere of influence, and even some that are generally perceived as neutral, also began their gold stockpiling efforts around the same time.
Gold’s rise is a reaction to the weaponization of the U.S. dollar
It is becoming clear that the weaponization of the American dollar against Russia – in retaliation for the invasion of Ukraine – sent a message that was very loud and very clear, not only to the Kremlin but to the rest of the world too. The world reserve currency, the anchor, the stabilizer and the trusted medium of exchange that countless countries rely upon, can and will be used as an offensive weapon in geopolitical conflicts. That same weapon that has been wielded against Russia could be deployed against any other adversary.
It is thus no wonder that so many countries chose to preemptively curb their exposure to the U.S. currency and seek refuge in the neutrality and safety of gold. As the Financial Times recently reported:
The dollar’s share of global foreign exchange reserves – excluding gold – has plummeted from more than 70 percent in 2000 to about 55 percent [in 2023], stripping out the effect of U.S. dollar appreciation, according to research from the International Monetary Fund. Including gold, the dollar’s share has dropped below half.
The rise and expansion of BRICS+ also play a role in the ongoing phenomenon. The grouping has been advocating for a more multipolar world order, and its founding members have aired the idea of launching a gold-backed currency. No matter how one assesses the realistic prospects of such a currency and its potential real-world impact, and despite the fact that BRICS+ is a rather loose alliance (compared to the European Union, for instance), the fact remains that the group encompasses about 3.5 billion people or 45 percent of the global population, controls 30 percent of the world’s land surface, and its members’ economies account for over 37 percent of global GDP.
Scenarios
Very likely: Non-Western gold purchases will continue
What seems entirely likely is that gold demand from BRICS+ members and non-U.S. aligned nations will continue to outstrip Western purchases. An outcome of this will be drift in the center of geopolitical gravity.
Possible in the long term: Gold-backed economies dethrone the U.S. dollar
As more nations accumulate more gold and slowly reduce their dependency on the U.S. dollar, the West’s geopolitical influence will inevitably grow weaker. As a result, the U.S. and its allies will have fewer levers at their disposal to enforce their global agenda. Eventually, they will be less and less able to protect their interests.
Unlikely: Complete dedollarization of the Global South
A scenario of complete dedollarization could lead to a tectonic shift in the global geopolitical order. In the extreme situation of the U.S. dollar being rendered effectively irrelevant, superpowers-in-waiting – Russia and China – could pose an existential threat to the current U.S.-dominated power structure. However, this appears unrealistic in the foreseeable future.
The euro, though it did manage to emerge as the second most widely held reserve currency (representing about 20 percent of international foreign currency reserves), still fails to pose a credible threat to the greenback’s global dominance. The Japanese yen or the British pound were never serious contenders, and the Chinese renminbi presents even less of a challenge: Its share of global foreign currency reserves dropped to 2.3 percent last year from its peak of 2.8 percent in 2022.
Gold is the only workable and viable alternative to the American currency. A widely accepted and reliable gold-backed currency, like the one that China and Russia have advocated for, certainly seems like an unlikely scenario – though it is not inconceivable. Highly improbable as it may be, should it come to pass, it would irrefutably mark the beginning of the end of the era of fiat currencies.
This report was originally published here: https://www.gisreportsonline.com/r/new-gold-rush/
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