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 | | | | 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) |
| | 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. |
|  | | 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.
In a simplistic sense, a reduction of geopolitical risk reduces the appeal of safe haven assets like gold. But the weaponization of the financial system that began in 2022 cannot be undone.
Treasury Secretary Scott Bessent at his confirmation hearing did make passing reference to the risks of financial sanctions along the lines of what we described above. He pointed to tariffs as a superior tool for economic coercion.
But precedent is set. Foreign countries cannot readily assume Trump or any future administration will not attempt to seize assets held at western banks.
Meanwhile, many aspects of Trump’s economic policy agenda going forward have the potential to favor gold in multiple ways.
Trump wants the dollar to maintain its position as the global reserve currency. He has stated this himself, including in his threat to tariff BRICS nations if they form a currency union.
But Trump does not necessarily want a strong dollar.
A strong dollar, in the sense of it trading high relative to other major currencies, lowers the cost of foreign goods and hurts domestic manufacturing in particular.
Services like health care, entertainment and education are generally performed locally and therefore do not compete with foreign businesses. But manufacturing does.
Does Trump want a weaker dollar?
A strong dollar makes imported goods more competitive and hurts exports.
To the extent the dollar stays strong relative to other major currencies over a long period of time, the U.S. industrial base could atrophy. Many think it already has, which has national security implications in addition to economic consequences.
In 2023, then Ohio Senator and now Vice President JD Vance openly questioned whether the U.S. should even aspire to maintain the dollar as the world’s reserve currency. His focus was on the harm it brings to American manufacturing. |
| | I am not sure that I think the reserve currency is actually good for the United States of America. I think there is a good argument that reserve currency status is akin to coal in Appalachia. It’s a resource curse…. I think it’s a massive tax on American producers. - JD Vance (4/6/2023) |
| | In a previous note, we explained how Stephen Miran, Trump’s incoming Chair of the Council of Economic Advisers, also believes the U.S. dollar is elevated as a result of its reserve currency status.
He views tariffs as a way of offsetting the negative impacts of a strong dollar by making foreign goods less competitively priced for American consumers.
Miran holds a Ph.D. from Harvard, where his mentor was Marty Feldstein, who for several years served as Reagan’s Chair of the Council of Economic Advisers. He is highly qualified—but not a household name.
Trump had many options. It is telling that he chose this relatively obscure economist, who happens to be laser-focused on the interplay between dollar strength and U.S. trade deficits.
We expect Miran to favor economic policies and strategies that tend to weaken the value of the dollar relative to other currencies. This would naturally translate into upward pressure on the gold price in dollar terms.
Tariffs trigger devaluations
A key observation of Miran is that foreign countries have historically reacted to U.S. tariffs by devaluing their currencies. By pursuing easier monetary policy (essentially printing money), they bring down the relative value of their currency.
Tariffs have the potential to push central banks in the direction of easier monetary policy and competitive devaluations, as countries effectively debase their own currencies to make their exports more competitive.
What does this mean for gold?
Gold is basically a barometer of the collective stock of fiat money. As the supply of gold stays relatively constant, but the global supply of paper money grows, the price of gold rises.
A broader shift towards hard money
Post-Covid and post-Ukraine, the U.S. dollar and U.S. Treasury bonds are not what they once were.
If we just go back four years, inflation in the U.S. was consistently close to targeted levels (2%). The national debt, while concerning, was not at such alarming levels.
The world has arguably entered a new paradigm. Faith in the U.S. to provide the world with monetary stability has eroded.
Meanwhile, internal political challenges and tension with the Trump administration tend to undermine confidence in the Euro and European governments and institutions.
Historically, gold has tended to trade inversely with interest rates. The reason for this has been that rising interest rates tempt investors to choose bonds or bank deposits over gold (which generates no yield).
Over the last four years, the relationship between interest rates and gold has broken. |
|  | Gold vs. Long-term Treasuries(10-Year Total Return) |
| As the chart above demonstrates, for many years leading up to the pandemic in 2020, gold and long-term Treasuries, as measured by the iShares 20+ Year Treasury ETF (TLT), traded with a high degree of correlation.
As long-term interest rates came down and bonds went up in value, gold would tend to rise as well. If rates fell, gold would move in the same direction.
Starting in early 2020, when Covid hit, we can see above how that pattern began to fall apart. In early 2022, when Ukraine erupted, the relationship deteriorated even further.
Just as the weaponization of the financial system undermined the comfort level of foreign countries and investors in U.S. bonds, the same could be said about the worsening financial picture of the U.S. government since 2020. |
|  | U.S. Public Debt as a % of GDP |
| The pandemic may be over, but the U.S. is continuing to run vast budget deficits. In fiscal year 2024, the U.S. government ran a deficit of $1.83 trillion, approximately 6% of GDP.
DOGE may uncover and put an end to substantial waste, fraud and abuse, but the stark reality is that 50% of U.S. federal spending is connected to entitlements (Social Security and Medicare) and defense spending. Another 13% covers interest payments on the national debt.
Treasury Secretary Scott Bessent aims to bring the federal deficit below 3% of GDP, through a combination of spending cuts and economic growth. This is an admirable goal, but it will not be easy to achieve.
Tariffs could be a source of incremental revenue, but in 2024, they only generated about $80 billion.
Meanwhile, the Trump team has its eye on significant reductions in personal income taxes (and has even discussed the elimination of the IRS).
Individual income taxes generated $2.43 trillion of revenue for the federal government in 2024, which represents about 49% of the total.
Tax cuts may be helpful for growth but are unlikely to improve the deficit situation, especially in the short-term. Depending on how they are implemented, they could potentially lead to steep revenue shortfalls.
As we discussed back in May 2024, the long-term fiscal picture is also quite dire. Demographic realities are driving unsustainable entitlement spending. Nothing has happened over the past year to improve this situation.
Money printing will continue
Central bankers around the world understand the consequences of persistent budget deficits and ever growing national debts.
Countries with fiat currencies are unlikely to default on their bond obligations in a conventional sense but will paper over their problems by growing the money supply.
Gold, as a supply-constrained alternative form of capital, should have enduring appeal as the U.S. dollar and U.S. bonds become increasingly unreliable as foundational reserve assets.
Gold also represents a tool for a central bank to weaken the relative value of its own currency while simultaneously solidifying its reserve base.
Central banks can essentially print money to buy gold—killing two birds with one stone. We have seen indications that this is precisely the strategy the PBOC is now pursuing. |
| Short-term considerations
Some of the recent momentum in the gold price may relate to technical factors.
Most physical gold trading occurs in London. There are reported delays affecting investors who store their gold at the Bank of England.
Many gold owners are transferring their holdings to vaults in New York. This has been attributed to concerns about potential tariffs that could be applied to gold, although such tariffs have not been confirmed.
There has also been a lot of attention paid to the possibility of an outside audit of U.S. gold reserves at Fort Knox and elsewhere.
For perspective, the U.S. Treasury internally audits the government’s gold holdings annually.
As the new Treasury Secretary, Scott Bessent recently assured the world that the gold is all there. We see no reason why he would be untruthful, especially given his offer to allow Senators to see it for themselves.
We take Secretary Bessent at his word, but if any gold is missing, this would be a big scandal and further erode trust in the U.S. government.
The attention to America’s gold reserves also raises questions about the right way to think about the value of gold in the context of the U.S. monetary base.
Some gold enthusiasts point to the relationship between the supply of gold held by the U.S. government and the total money supply of the United States.
What if U.S. dollars were to become fully backed by U.S. gold holdings?
We calculate this implies a price per ounce of gold of approximately $76,000 (some 25 times higher than the current price).
We do not expect gold to appreciate to this extreme extent, but it is an interesting point of reference.
This thought experiment suggests gold has significant further upside potential as a global monetary asset relative to U.S. dollars.
How to own gold
Investors have many options when it comes to gold. Gold can be purchased and stored in physical form. There are many platforms that support direct ownership.
Gold exposure can also be achieved through publicly traded securities. Gold Exchange Traded Funds (ETFs) are available worldwide.
Interestingly, gold ETFs have seen rapidly growing demand in India.
This emerging source of investment demand for gold is noteworthy in that it is coming from the world’s most populous country. India also happens to have one of the fastest growing economies. |
|  | Gold ETFs are increasingly being introduced and marketed to Indian investors, who bought unprecedented levels of gold via ETFs in January of 2025.
In the U.S., investors interested in gold ETFs may wish to investigate the SPDR Gold MiniShares Trust (GLDM) and the iShares Gold Trust Micro ETF (IAUM). These are lower fee versions of the original gold ETFs launched by two of the largest ETF managers.
Another interesting ETF option is the VanEck Merk Gold ETF (OUNZ), which has a unique provision that allows for physical redemption. Few investors will likely take advantage of this option, but it is a structural feature that brings the security somewhat closer to owning physical gold.
In our Inflation Protection Model Portfolio, we hold a number of stocks that provide exposure to gold royalties. We believe these stocks offer a compelling form of long-term gold exposure with dividend potential as well. |
| | Don’t forget about Bitcoin
It should be mentioned that Bitcoin functions much like a digital version of gold. Like gold, Bitcoin is a bearer asset—whoever holds the keys to the account on the blockchain controls the account.
Bitcoin, like gold, is supply-constrained. The supply of gold only grows by 1% to 2% a year, because of the scarcity of the metal and the challenges associated with mining it. The total supply of Bitcoin also increases slowly.
By design, the total amount of Bitcoin that will ever circulate is 21 million. Currently, 19.8 million bitcoins are in circulation.
Bitcoin mining is generally expected to continue until around 2140. At that point, the 21 million coin limit will be reached, and miners will only be compensated through transaction fees.
Bitcoin may one day become a meaningful asset class for central banks. Currently, however, the total market capitalization around $2 trillion (with much of it tightly controlled) is too low for serious consideration.
For perspective, the total value of above-ground gold in the world is now over $20 trillion (about half of which is investment gold and half of which is associated with jewelry or industrial uses).
Bitcoin also lacks gold’s history, spanning thousands of years, as a store of monetary value. Bitcoin only came into being in 2009.
Central bankers are not day traders. Their job is to safeguard their national economies. They are generally interested in owning proven and reliable monetary assets.
Yet real central bankers are looking into Bitcoin.
On January 30, the Governor of the Czech National Bank tabled a proposal to his board to investigate “the possibility of creating a bitcoin test portfolio.”
Many investors in gold, which is arguably the ultimate tangible asset, have an instinctive aversion to Bitcoin, which is completely intangible.
But what gold and Bitcoin have in common is that they represent decentralized hard money.
As technologies to store value, they each have their pros and cons.
There are other precious metals and other cryptocurrencies, but in terms of market value and acceptance, gold and Bitcoin have no close rivals within their respective spheres.
We urge gold bugs, at a minimum, to keep an open mind! |
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