A Silent Gold Revolution Is Taking Place. But It Won’t Be Silent for Long.

The use of gold as money and gold standards in various forms existed from antiquity until gold backing broke down entirely in 1971. Still, central banks and finance ministries hold over 37,000 metric tonnes of gold in reserve. Why?

The answer is that gold is still at the base of global monetary systems. It’s simply the case that no government wants to admit this because the shortage of gold relative to bank notes would be exposed if they did. That’s all about to change. Gold is coming to the fore of the monetary system again.

Central banks are buying gold as fast as they can. The dollar price of gold today is $2,750 per ounce (subject to the usual daily fluctuations). As recently as November 3, 2022, gold was $1,630 per ounce. That’s a 69% gain in under two years. Gold was $1,375 per ounce in early June 2019. That means the dollar price of gold has doubled in just over five years.

Most of the gains over that period have occurred in the past year. Gold was still $1,845 per ounce in October 2023. Whether we consider a multi-year trend or a more recent trend, gold has moved steadily higher with dramatic momentum lately.

Despite two bull markets (1971-1980 and 1999-2011) and two bear markets (1980-1999 and 2011-2015), gold investing never captured the popular imagination in the way that housing did in the early 2000s or that stocks have today. Individual investors have been in and out of the market and investors from the early 2000s have done quite well. The institutional investor footprint in the gold market is almost non-existent.

From an investment perspective, gold has been an orphan asset with a few supporters but not many. That’s all about to change radically.

Here’s why: The first key to gold’s coming surge is the role of central banks. Retail and institutional investors may not be that interested in gold, but central banks definitely are.

In recent years, central bank holdings of gold have surged from 33,000 metric tonnes to over 36,000 metric tonnes, a 9.0% gain measured by weight. This increase has been heavily concentrated in two countries – Russia and China. Russian gold reserves have risen from 600 metric tonnes in 2008 to 2,335 metric tonnes today, a gain of 1,735 metric tonnes or nearly 300% from the 2008 base. China also had about 600 metric tonnes in 2008 and today has 2,264 metric tonnes, a 275% gain. (There is good reason to conclude that China has undisclosed gold reserves which would make those total and percentage gains ever higher).

The Big Ten holders of gold include the usual suspects – U.S. (8,133 mt), Germany (3,351 mt), Italy (2,451 mt), France (2,436 mt), Switzerland (1,039 mt), and Japan (846 mt). But the list also includes some newcomers such as Russia (2,335 mt), China (2,264 mt) and India (849 mt). Why the large gold holdings and why the rapid additions to gold reserves if gold is not a monetary asset? The question answers itself.

Gold is a monetary asset. Central bank net buying is equivalent to about 20% of annual gold mining output. That does not indicate a gold shortage, but it does put a firm floor under the dollar price of gold. That creates what we call an asymmetric trade. On the upside, the sky’s the limit but on the downside, the central banks have your back to some extent because they will definitely buy the dips to increase their gold hoards. That’s the best type of trade to be in.

So, the stage is set. The simple math of easier percentage gains for constant dollar gains is the dynamic that can set off a buying frenzy and lead to super-spikes in the dollar price of gold. Central bank buying causes a relentless increase in the dollar price of gold and offers limited downside because they will buy the dips. All that is needed to set off the super-spike is an unexpected development that is not already priced in. Whether it’s the BRICS, wars around the world or a simple “everything hedge,” the match has been lit to ignite a rocket launch for gold prices.

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