Gold has fascinated humankind for centuries. It is a source of beauty and used as an adornment, but it is also one of the world’s oldest currencies. When the Spanish conquistadores met the Aztec and Inca leaders in the 16th century, one common point was a shared veneration for this precious metal, which retains an almost mystical hold over many people’s imaginations.
Central banks have deposits of gold, and there have been attempts to link paper currencies to a gold standard at times over the past century.
For investors, it is a safe, ultra-cautious asset. Unlike bonds, it does not have an interest rate yield. Unlike equities, it does not pay out dividends. But sometimes a paper currency and a listed company end up being worth nothing. The demand for gold is therefore a hedge against times of upheaval and uncertainty.
It is therefore not surprising that in this age of conflict and superpower rivalry, demand for gold, and hence its price, has risen – up from below $2,000 per ounce during 2023 to around $2,300 by mid-April.
Gold is the metal used for most wedding rings and other jewellery. It has some industrial applications: used in tiny amounts for circuits in electronic devices including smartphones – it is an efficient conductor of electricity and very slow to corrode. But market prices tend to be above what might be considered the value based on utility.
Purchases of gold are often seen as a hedge against inflation, but prices were subdued during the high inflation of 2022 and only started to rise this year, after inflation has fallen. And there is no correlation between the gold price and purchases of gold through exchange-traded funds (ETFs), the usual route through which citizens and some institutional investors to buy gold through brokerage accounts.
An analysis in The Economist identified three categories of buyers behind the rise in the price this year: central banks, major institutions such as mutual funds, and ordinary citizens, including in the US.
China’s central bank has raised its share of reserves held in gold from 3.3% at the end of 2021 to 4.3%. In March this year it added 160,000 ounces of gold, worth $384mn. A likely additional motive for China is to guard against potential sanctions against its banks by the US, such as those that have been imposed on Russia following the Ukraine invasion of 2022. It has developed an alternative bank settlement system to the global Swift system – from which Russia has been barred.
The Qatar Central Bank has also boosted its gold reserves, rising threefold since 2019, from QR7.5bn by value to more than QR24bn by 2023. Between 2000 and 2023 Qatar’s average gold reserves were 21.35 tonnes; by the fourth quarter of 2023 they reached 100.95 tonnes.
The motive behind some institutional investors appears to be a hedge against inflation returning and major upheaval in the future. This is a long-term hedge, explaining why the gold price does not rise in synch with short-term inflation trends.
A more fascinating trend is the rising retail purchases of gold by consumers. Until recently, such purchases were in emerging economies with a record of depreciating currencies. In August last year the major retailer Costco in the US began selling one ounce bars of real gold, at $2,000 each. It sold out immediately, and restocked. An estimate from the bank Wells Fargo is that US citizens are purchasing $100mn-$200mn-worth of gold bars each month from Costco. This is highly significant. It is a sign of declining confidence by many US citizens in their currency and their governing institutions.
The constituencies buying gold share a common perspective: long-term pessimism about the global economy in general, and the US currency in particular. Since President Nixon ended the link between the dollar and gold reserves in 1971, the economic world has trusted the US authorities to maintain a hard currency, a trust that appears to be weakening.
The US debt and deficit are not on a sustainable path. The US Congressional Budget Office projections indicate that the debt-to-GDP ratio is set to break the 100% mark within a year or so, and could reach 172% by 2054.
The Federal Reserve is likely ultimately to be forced to cut interest rates and permit inflation, and once this occurs, the dynamics are unpredictable.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.
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