Gold prices are climbing steadily, up more than 60% this year alone - the strongest increase in nearly half a century. If adjusted to inflation, gold has never been as expensive as it is now. The question is: Is this another speculative fever, or a fundamental shift in the global financial system?
Assets that increase too quickly compared to the long-term trend often cool down soon. Gold fell into that scenario in the late 1970s, when it plummeted by nearly two-thirds after just five years of peak. But now, the story is different. The precious metal, considered an enduring store of value, is returning to the center, reflecting profound changes in the world monetary order.
After the credit crisis in the 1920s, gold prices were revalued at higher levels. During the "super inflation" period in the 1970s, gold continued to break out, but then fell into a state of "winter sleep" for two decades when real interest rates were high. In the early 2000s, after the FED sharply lowered interest rates, gold entered a long-term uptrend. During the period of monetary easing and zero interest rates from 2008 to 2022, gold prices fluctuated but still maintained an upward trend.
As central banks simultaneously raise interest rates in 2022, gold is expected to fall sharply but the opposite has happened. Gold prices increased sharply, despite cooling inflation and rising bond yields. According to Daniel Oliver, founder of Myrmikan Capital, this turning point stems from the decision of US President Joe Biden to seize Russia's foreign exchange reserves after the war in Ukraine broke out. That action rocked the foundation of the international monetary system, where the US dollar has been a mainstay for decades.
After that shock, many central banks began searching for an non-soverness asset that could not be frozen, not the obligation of any government. And they return to the most classic asset, gold. Over the past three years, global central banks have purchased more than 1,000 tons of gold per year. Goldman Sachs expects this trend to continue, as many emerging economies still hold quite modest gold holdings. In China alone, according to published data, gold accounts for only 6.5% of total foreign exchange reserves, although analysts reported a much higher actual figure.
From a market perspective, gold prices over the past three years have looked like a classic investment bubble. However, the unreasonable excitement often seen in fevers is absent. Speculators are now focusing on cryptocurrency and AI stocks, rather than gold - a brutal relic as John Maynard Keynes said. Gold held in ETFs remains 10% lower than the peak in 2020, while outstanding stocks of VanEck Gold Miners ETF, an investment fund in gold and silver mining companies, have fallen about a third.
All show that this increase is not the appearance of a pure speculative fever. Instead, gold may be being repositioned: From safe-haven assets to strategic reserve assets in the context of no longer absolute confidence in the USD. If that is true, this is not a bubble but a turning point in the global monetary order taking shape.
