The gleaming of gold in global markets suggests volatility ahead

A safe haven in turbulent times, there are deeper reasons why gold still shines, including a possible role in finding a dollar alternative, but drawing lessons from the past is increasingly difficult.


The gleaming of gold in global markets suggests volatility ahead

A rallying gold price reaching record levels has caught the attention of the markets and the media and triggered a debate as to why. Commentators, investors, and analysts watched as the world went through turbulence between 2022-24, only for the price of gold to remain steady, mainly hovering between $1,300 and $1,600 per ounce.

Suddenly, it has taken off. In March, it began climbing towards the $2,000 barrier. At the time of writing, it was $2,353 per ounce. What are the implications? A move into gold has long been known as a move to safety. If the markets operated on logic, increasing turbulence ought to elicit increasingly higher gold prices and vice versa. Yet, it often isn’t so.

Nathan Mayer Rothschild, the 19th-century London financier and founder of his famous family’s English branch, once said: “I know only two people who really understand how the price of gold is determined, but unfortunately, they often don’t agree.”

In 2021, the Federal Reserve Bank of Chicago looked at what had moved gold prices since 1971 and found three factors: gold as protection against inflation, gold as a hedge against economic meltdown, and gold as a reflection of interest rates.

Gold and inflation

Received wisdom is that gold protects against inflation, but this varies greatly according to the specifics of place and time, and some analysts doubt whether it is true, questioning the statistical evidence to back it up. Those who thought gold would act as a hedge against inflation were disappointed in 2022 when prices fell even as inflation went stratospheric.

Furthermore, gold tends to do well during periods of deflation, as noted by the statistician Roy Jastram in his book The Golden Constant, where he tracked gold prices and purchasing power over four centuries, from 1560 to 1976. He concluded that gold is a poor hedge against major inflation, that it appreciates in operational wealth (purchasing power) in times of deflation, and that its purchasing power has remained consistent for hundreds of years.

The well-known annual report In Gold We Trust, produced by researchers at a Lichtenstein-based asset manager, focuses on gold’s properties as a “monetary asset,” making it distinct from other commodities. It points out that the optimal financial conditions for keeping volatility out of the gold price are those of the “moderate economy,” which is “neither too hot to release inflation nor too cold to fall into recession.”

Like any other market, the dynamics of supply and demand also play a crucial role in determining the price of gold. If demand increases, the price rises, and vice versa.

A saleswoman picks gold necklaces to show it to a customer inside a jewellery showroom on the occasion of Akshaya Tritiya, a major gold buying festival, in Kochi, India.

Gold and monetary policy

Gold prices have sometimes been sensitive to monetary policy, specifically interest rates and especially ‘effective interest rates’ (short-term interest rates set by central banks minus the current inflation rate). Gold is often held or bought when returns from cash, shares, and bonds are poor, which in turn stokes gold’s price. This happened during the 1970s and again in the 2000s.

When effective interest rates are high, helping other assets yield better returns, there is less incentive to buy gold (which offers no yield, cash flow, or dividend and has storage costs). This pushes its price down, as seen in the 1980s and 90s. Yet, in recent months, high inflation has led to sharply rising real interest rates. Analysts say gold prices “should have fallen significantly” in this environment, yet they have not.

According to Ronald-Peter Stöferle and Mark J. Valek, authors of the 2024 In Gold We Trust report, “the collapse of the correlation between the gold price and real interest rates raises many questions. In the old paradigm, it was unthinkable that the gold price would trend firmer during a phase of sharply rising real interest rates”.

Gold and the dollar

There is also a correlation between gold and the dollar, the currency that denominates precious metal prices. A small fall in the dollar can send the price of gold soaring, and vice versa, although they may also occasionally move in the same direction.

From 1973-80, the dollar fell and gold rose from $35 to $800 per ounce. From 1980-85, the dollar rose and gold lost more than half of its value. In 2002, the dollar fell and an ounce of gold jumped from $250 to $1,400.

The relationship between gold and the dollar is not systematic, yet the negative correlation between them is much stronger than the correlation between gold and other currencies, because the dollar is also the global reserve currency that competes with gold during periods of high tension.

Jeffrey Frankel, professor of economics at Harvard University and a member of former US President Bill Clinton’s Council of Economic Advisers, points out that the dollar has long been the world’s leading safe-haven currency.


Yet he also says investors want to diversify their assets and buy gold after the dollar's position as the world's reserve currency was politicised by the last US President, Donald Trump, citing the imposition of US sanctions and economic mismanagement during the COVID-19 pandemic. In addition, there are reports that if re-elected in November, Trump will introduce a bill that imposes sanctions on those who do not use the dollar in global trade.

Gold has several virtues. One is that it can be used as a store of wealth independent of government influence. Another is that it is a relatively liquid asset, meaning it is easy to find buyers for it. In some senses, that lets it function like an international currency, an appeal that global tensions highlight.

The gold price rose during the 1970s when leftist movements from Asia (Vietnam, Afghanistan) to Europe (France) were on the rise. In 2008-9, during the global financial crisis that began with US mortgages, there was the largest transfer of gold ever (from Europe to the US).

In 2024, clouds have once again gathered, with war still raging in Gaza, the Houthis in Yemen diverting the world's shipping, China's increasing aggression towards neighbours, Russia's ongoing invasion of Ukraine, sharply rising military spending, and an unpredictable US election pending. This seems to have heralded a move away from riskier assets, with gold being one of the beneficiaries as a haven asset.

Central bank buyers

According to Stöferle and Valek, gold is now in uncharted territory (or "terra incognita") to the extent that there is now "a new gold playbook." One feature of this, the authors say, is that "Western financial investors are no longer the marginal buyers... central banks and the steadily growing demand from emerging markets, especially China, have for the first time been able to more than compensate for weak demand from the West."

Gold buyers range from jewellers, investors, private individuals (who use it to gift wealth as well as a form of saving), and industrial companies. It is used in electronics, medical equipment, and space travel, to name but some areas. But the main source of gold demand is major financial institutions, including central banks and the International Monetary Fund (IMF). The European Central Bank (ECB) is among the biggest buyers.

Central banks have become net buyers of gold to give their reserves a financial ballast, with the added benefit that national gold holdings enhance confidence in the currency, protect public solvency, and act as a guarantee against the risk of default. Again, these benefits are factors for those looking to reduce their dependence on the dollar, which may help explain why central banks in China, India, and Russia have led institutional demand for gold in recent years.

In recent years, central banks in China, India, and Russia have led institutional demand for gold, with an eye on reducing their dependence on the dollar.

Other banks worry that their dollar reserves are losing purchasing power, as the US Federal Reserve prints billions of dollars by way of monetary easing, and to support US allies such as Ukraine, Israel, and Taiwan.

Gold does not just attract the legitimate. Those who seek to launder money are also interested in it since it can be bought and sold without a bank account, and there will always be buyers. Ironically, this can help to underpin its value.

Nuggets of value

Gold is typically dug and extracted from mines. The world's largest are in South Africa, Ghana, Indonesia, and Peru, with others in China, Russia, Canada, and the US. According to the World Gold Council, annual extraction rates have stabilised in recent years at around 3,000 tonnes.

Since the supply is less than the demand, valuations are underpinned by the secondary market. Yet, it is a finite resource, and supply-side worries persist. Some think extraction figures could start dropping in as little as 15 years. Output at major mines is already down, and the scale of investment required to reach remaining deposits, for instance, by sinking much deeper mines, makes it unviable.

Since surface-level deposits have become increasingly scarce, operators are contemplating mining deeper underground, but temperatures can top 60°C at depths of more than 3,500 metres, and pressure can reach 10,000 tonnes per m3. AngloGold Ashanti's Mponeng mine near Johannesburg is more than 4km deep in places. To cool the air, more than 6,000 tonnes of ice slurry are pumped into underground reservoirs, and giant fans facilitate airflow.

Yet South Africa is not one of the world's biggest gold producers. That title goes to China, closely followed by Russia and Australia. China is also the largest buyer of gold, purchasing 225 tonnes in 2023.

Diana Estefanía Rubio

The value of an asset with a widely accepted value and of limited supply is more prevalent as fears grow of bubbles in the world economy.

Investor Warren Buffett, known as the 'Sage of Omaha' for his famed stock picking, has warned of the danger posed by financial instruments valued at ten times the size of the world's economy as measured by combined gross domestic products. Such ticking time bombs pose a risk to the entire financial system, the sage says.

National gold reserves

Who has the most gold? At the end of 2023, the US had the biggest gold reserves, with 8,133 tonnes. Germany was second with 3,352 tonnes, Italy with 2,451 tonnes, and France with 2,436.9 tonnes. Russia and China also had more than 2,000 tonnes.

The IMF's gold reserves stand at 2,814 tonnes, with each member country required to pay 25% of its quota in gold. The ECB has 506 tonnes, but the US tops the scale considerably. With more gold than Brazil, Russia, India, China, and South Africa (the BRICS states) combined, the BRICS will face an evident problem if they choose to launch a single currency backed by gold to compete with the dollar.

Furthermore, the reserves of the wider Western bloc (the US, the European Union, and EU countries), combined with those of allies and economic partners such as Switzerland, Britain, Japan, Taiwan, South Korea, and Australia, totals more than two-thirds of the world's gold. Gold price fluctuations sometimes appear to be seasonal. Over the past 50 years, analysts have shown that July has been a key buying month, the price often rising from July to February before steadying or falling thereafter.

In the five years from March 2019 to March 2024, the price of gold has risen by 69%, hitting $2,050 per ounce. On 24 April, it was $2,320 per ounce, up 12% since the start of the year. To compare the jump in pace, it rose 14% across all of 2023. At the time of writing (the end of May), it was $2,353 per ounce, continuing a generally upward trend. However, its runs have been volatile, with graphs showing two significant declines over recent months.

The most important events driving this trajectory were the purchasing policies pursued by several central banks, led by China, Poland, Singapore, Libya, and the Czech Republic, alongside difficulties faced by the banking systems in the US and Switzerland. Conflict in the Middle East since October 2023 also contributed to a sharp rise in the price of gold.

The US has the biggest gold reserves, with 8,133 tonnes. Germany was second with 3,352 tonnes, followed by Italy and France.

Price forecasts

For 2024, Stöferle and Valek say "a second wave of inflation or the overdue US recession" could tempt those not already buying gold to do so. They also suggest that states "reaching the limits of debt sustainability" could do likewise.

Notably, the futures market in gold has started to gain momentum, with premiums on international prices exceeding the historical average. Interestingly, there are also predictions of potential new price correlations, including with the price of electricity, which could raise production costs.

The investment case for gold has long been intriguing. While its price fluctuations are influenced by a range of factors, fundamental factors also set the pace. A financial asset in its own right, gold can also act as a store of value and a means of exchange, giving it currency-like properties and helping it endure through the centuries.

History shows that fiat money, or currency that gets its value from being backed by a state tends to lose value and status over time. One day, this may reach the dollar. Some signs suggest it already has, depending on how you measure purchasing power. For instance, one dollar today is worth only 0.03 of its value in 1900.

When contemplating the future, it seems wise to remember the words of Belgian writer Jacques Sternberg, who once said, "Man (and his paper currencies) evolve in the opposite direction to gold over time."

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