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QUICKTAKE

February 21, 2025

Gold Rises as the World Chases Hard Money

There are shortages of gold at the Bank of England, while in the United States there are serious calls for a proper audit of America’s gold reserves at Fort Knox.


Gold is suddenly on everyone’s mind.


Gold is also off to a very strong start this year, up some 12% year-to-date. It is significantly outpacing the S&P 500 Index, which is up about 4%.


Is this just short-term noise… or a signal of more good things to come for gold owners?


We continue to have a positive long-term outlook for gold and gold-related investments.


While there may indeed be some technical factors lending support to the gold price at the moment, we see these as signs of enduring structural demand for gold in the context of a rapidly changing geopolitical landscape.


In April of last year, we published an article on gold. We explained our positive outlook, which was heavily based on shifts in central bank behavior in the wake of the Ukraine conflict.


Gold has since appreciated approximately 23%.

Even if there is short-time relief, many central banks around the world are likely to continue to prioritize gold reserves over the paper obligations of the U.S. government or other aligned nations. The same goes for private investors. We continue to recommend a material portfolio allocation to physical gold and other gold-related investments. Gold-related investments remain a core component of our Inflation Protection Model Portfolio. - Will the Gold Rally Last? (4/19/2024)

Click HERE for instant access to all 76report investment research for only $1 per month (promo code DOLLAR).

Ukraine changed everything


Gold is widely viewed as a safe haven asset that performs well in periods of war and geopolitical uncertainty. As risk perceptions go up, investors tend to flock to gold.


“Risk-off” conditions certainly applied in early 2022, when the Russian “special military operation” commenced in Ukraine. But the impact on gold markets went deeper than the market’s usual aversion to armed conflict.


The Biden administration decided to support Ukraine through financial sanctions, which included freezing Russian assets that were held in institutions over which the U.S. had legal and practical control.


The weaponization of the financial system sent shockwaves around the world.


Financial assets held by governments at various banks around the world were now at risk of confiscation based on the U.S. government’s position on that nation’s foreign policy.


Demand for gold began to build because it is an asset that is essentially exempt from sanctions risk.


Government bonds are effectively IOUs and therefore carry counterparty risk. The issuer of the bonds can refuse to make payments, or a third party intermediary can block those payments.


Gold, by contrast, is a bearer asset.


This means that whoever physically controls the asset owns the asset and generally has the ability to sell the asset. Gold can be shipped internationally and safely stored in bank vaults located within a country’s own borders.


The primary job of central bankers is to decide how to allocate foreign exchange reserves. These are financial assets denominated in currencies other than their own.


Foreign exchange reserves are used to settle international trade flows. In many cases, they are used to help central bankers exercise control over foreign exchange rates.


In crises, foreign exchange reserves can be used to prevent a currency from collapsing. The central bank in this scenario uses the reserves to purchase and prop up their own currency in international markets.  


As a non-sovereign asset with zero counterparty risk, gold is unique among the options available to the world's central bankers. (A potential exception is Bitcoin, which we address below at the very end.)


Playing catch-up


Most of the nations of the world hold their foreign currency reserves in U.S. or Euro-area government bonds.


With some notable exceptions, gold at the nation-state level is owned in large proportions only by the U.S and a handful of European countries that were historically wealthy and had gold-backed currencies.


According to the World Gold Council, out of 36.2 million tons of gold currently owned by the world’s central banks, the U.S. (22%), Germany (9%), Italy (7%) and France (7%) collectively own some 45% of the total.


Relative to the size of their populations and economies, emerging market countries like China and India own comparatively little gold.


China has slightly less gold than France. India has less than 40% as much gold as China.


These emerging market countries are also precisely the ones who are most at risk when it comes to U.S. coercion within the global financial system.


China is viewed by the U.S. as an adversary. India is historically non-aligned and is highly dependent on Russian energy.


Central banks around the world have been net buyers of gold ever since the Global Financial Crisis in 2008, which introduced the world to quantitative easing and raised fundamental questions about fiat money.


Central bank gold purchases have only accelerated since 2022, when the Ukraine conflict began.  

Source: World Gold Council

Over the past three years, the world’s central banks, led by emerging market countries, have accumulated over 1,000 tons of gold annually. This is more than double the average net purchases of the prior ten years.


China, which still has less than 6% of its total foreign reserves in gold, has been particularly active.


With some $3.2 trillion, the People’s Bank of China (PBOC) has the largest reserves of any nation as a result of enormous trade surpluses. The PBOC’s holdings are not made public, but estimates suggest about half is still in U.S. dollar denominated instruments.

China’s gold reserves

PBOC gold purchases picked up substantially towards the end of 2022 and then paused in 2024. Recent data shows China resuming net purchase activity over the last three months, however.


With aggressive stimulus measures underway, Chinese consumers are also playing an important role in gold demand—in the form of jewelry as well as small bars and beads (held for investment purposes).


Chinese internet search provider Baidu has reported a significant uptick in “gold” as a search term. The keyword index recently reached levels not seen in over a decade.

A multi-polar world


As Trump and Putin’s representatives negotiate the future of Ukraine in Saudi Arabia this week and attempt to bring the bloodshed there to an end, one might be tempted to think that the reversal in geopolitical risk will be negative for the gold price.


Our sense of the impact on gold markets of the end of the Ukraine war is the opposite.


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