Gold Hits New All-Time High. This Rally Is Just Getting Started.

After two years of trading in a 20% range between $1,600 and $2,000 per ounce, gold finally broke out to the upside, closing at a new all-time high of $2,126 per ounce on March 4. Better yet (if you’re a gold investor), gold has held its ground at around $2,100 per ounce since breaking that ceiling. The price is volatile, but gold broke even higher on March 5 when it hit $2,140 on an intra-day basis.

Before getting too euphoric, gold investors should recall that the $800 per ounce record set in January 1980 during borderline hyperinflation would be $3,200 per ounce in today’s dollars if adjusted for inflation. That can be a splash of cold water in the face.

On the other hand, it’s highly encouraging. If gold is in a new bull market, $3,200 per ounce looks more like a price target than an insurmountable hurdle. The bigger questions are: what are the factors driving gold higher, and will they continue the trend?

Some of the factors are clear. Central banks have been net buyers of gold since 2010 after being net sellers from 1970 to 2009. Mining output has been flat for the past eight years; it’s not shrinking, but it’s not expanding either. That combination of strong demand from central banks and flat output from mining is a recipe for higher prices and a de facto floor.

Some analysts point to potentially lower interest rates as a driver of higher gold prices since fixed-income instruments compete with gold (which has no yield) for investor dollars. It seems likely that the most powerful driver is the one getting the least attention.

At the start of the War in Ukraine, the U.S. froze about $300 billion of U.S. Treasury securities lawfully purchased by the Russian Federation. Legally, those securities are still owned by Russia, but they cannot be sold, traded, transferred, or used as collateral. (By the way, this is easy to do because all Treasury securities are held in digital form by custodians on a ledger ultimately controlled by the U.S. Treasury).

Now the U.S. is trying to seize those securities. This is outright theft. Such theft is contrary to numerous provisions of domestic and international law, but the U.S. is pushing the main custodian, Euroclear in Belgium, and European banks to amend their laws or ignore them for this purpose. Other countries are watching.

China, South Korea, Japan, Saudi Arabia, Taiwan, and other nations have hundreds of billions of dollars each in U.S. Treasuries in their reserve positions. Watching what the U.S. is doing to Russia is causing those countries to consider alternatives to Treasuries. That’s easier said than done.

If U.S. Treasuries are in danger of being stolen, it’s not clear Euro- or Yen-denominated securities are any safer. Gold is the liquid, safe alternative and appeals to many investors in a world where Treasuries can be confiscated at will.

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