Why gold is surging and what it tells us about global stability

Some things never go out of fashion.

For thousands of years, gold was the global medium of exchange and, until 1971, it was the standard upon which the US dollar valued itself until it was finally discarded.

In more recent years, its reputation took a hit from talk digital currencies would usurp its hallowed status as a store of wealth.

Not any longer.

A few weeks back, the cost of a single bar of gold pushed through the $US1 million mark as the precious metal surged to new records.

Gold prices have doubled since 2019 and, in the past two years, have headed into orbit as inflationary clouds gathered over the global economy.

But despite most major developed nations signalling victory over inflation — with interest rate cuts in the UK, Europe, Canada and the first expected this week in the US — the upswing hasn’t abated.

Already this year, the price has jumped 21 per cent, consistently punching through new records, as this graph, measured in US dollars, illustrates.

With further gains expected this year, that’s left some experts baffled, given gold traditionally was primarily seen as a safe haven for investors during times of financial turmoil.

Who are the buyers?

Rather than investors seeking a safe harbour, the renewed interest instead comes from central banks fearful of the recent increase in geopolitical tensions.

The ongoing conflict in Ukraine, after Vladimir Putin’s invasion two years ago, the potential for the war in Gaza to spread across the region and the prospect of an escalation in trade hostilities between the US and China have brought the era of globalisation to an end.

On top of that, America’s huge lift in federal government debt — that’s seen its annual interest bill top its defence spending — and the ongoing prospect of endless deficits has undermined its position as the world’s reserve currency, prompting other nations to look for alternative sources of foreign reserves.

They’ve reverted to gold.

In the past two years, central banks — primarily from Asia, Eastern Europe and the Middle East — have been desperately scouring global markets to add to their gold reserves, a trend which has continued this year as they added record amounts to their reserves.

The People’s Bank of China (PBOC) last year was the world’s biggest buyer, snapping up 7.23 million ounces, the most by the country for at least 46 years.

The move could be interpreted as a worrying measure of the breakdown in relations between the world’s two biggest economies, with China now actively replacing its US dollar holdings with gold.

In the past two years, the PBOC has dramatically increased its gold exposure in its foreign reserves.

Like Russia, it has paid for the purchases by dumping holdings in US government bonds.

In addition, India, Poland, Singapore, the Philippines, Turkey, Iraq, Qatar, Libya, Kazakhstan and the Czech Republic all have added to their reserves.

All have doubled down on purchases in recent years to the point where central bank purchases hit a record in the first few months of the year.

Can the greenback retain its reserve currency status?

A common theme running through precious metal markets is the concern from central banks about the denigration of what is known as fiat currency, or government-issued money.

In 1971, America abandoned the gold standard — where the greenback was tied to the value of gold — because it inhibited its ability to spend.

Debt levels, however, have since exploded, raising concerns about its longer-term ability to continue funding ever-expanding deficits.

While America hasn’t bought any gold on the open market since 2006, it hasn’t sold any either.

And it still holds more gold in reserve than any other nation, delivering a large measure of support for its position as the most heavily backed currency on the planet.

Until this recent splurge by central banks, gold prices mostly were influenced by the lustre and appeal of the yellow metal for jewellery.

In fact, this remains the largest source of annual demand. And while China and India have been shoring up their reserves, citizens of both countries dominate global jewellery markets, accounting for more than half the trade.

They are closely followed by Asian and Middle Eastern markets, where there is demand for higher-carat gold.

And for the main part, Australian gold producers have been cheering.

As the third-biggest producer — after China and Russia — with 293.8 tonnes produced last year, Australian miners have been given an extra boost by a puffed-up US dollar.

At $3,720, it is up almost 25 per cent so far this year.