In a high-security vault in London’s Mayfair, where the glass is thick enough to resist automatic gunfire and four control rooms keep watch around the clock, some of the world’s wealthiest individuals have been rushing to store gold.
The small safes inside, which cost as much as £12,000 annually, are set to be full by the end of the year as clients resort to securing more hard assets, a sign of the troubled times.
Clients have a growing “alertness to the new world order”, says Ashok Sewnarain, chief executive of IBV International Vaults, the Mauritian company that owns the vault. “We have mistrust in the banks, huge inflation and a global divide on reserve currencies.”
The rush to gold by the global elite is being mirrored by emerging market central banks. Last year central banks bought 1,079 tonnes of bullion — the most since records began in 1950.
As a result gold has been hovering close to its nominal all-time high of $2,072 per troy ounce — the traditional unit for precious metals — since late March. Many speculators, or gold bugs, are holding their breath as they wait for a new record to be set.
Gold has long been a safe haven in times of turbulence, and that is no less true today. Coronavirus, the war in Ukraine, geopolitical tensions, inflation fears, mounting global debt, high interest rates and the banking crisis have all prompted investors to re-evaluate safe-haven assets. Gold has been the beneficiary.
“In the past decade, it was low inflation and high growth, globalisation and peace, laissez-faire economics and an invisible hand, and tech outperformance,” says Nicky Shiels, head of metals strategy at MKS Pamp, a Swiss precious metals trading firm. “Each of these structural themes is unwinding concurrently, which is creating a positive environment for gold and other commodities.”
There is also a geopolitical factor, as developing countries grow wary of the strength of the US dollar. As the west imposed sanctions on Russia following the invasion of Ukraine, the US and its allies froze $300bn of foreign exchange holdings denominated in dollars, euros and sterling. That alarmed many countries with US dollar holdings, whose central banks have been racing to diversify their holdings, and buy more gold.
“Gold has become progressively geopolitical,” says Sebastien de Montessus, chief executive of Endeavour Mining, a London-listed gold producer.
The revival in gold’s fortunes has central bank officials, fund managers and retail investors wondering whether the world is on the precipice of a new gilded period. Some forecasters reckon gold could escalate towards its real record high of nearly $3,300 per troy ounce in today’s dollars, set in 1980 when oil-driven inflation and turmoil in the Middle East capped a nine-year bull run unleashed by US president Richard Nixon cutting off the dollar from bullion.
If today’s stagflation, geopolitical tensions and dedollarisation persist, then some say bullion will keep shining. “Is this a new era? Simply, yes,” says Ruth Crowell, chief executive of the London Bullion Market Association, which sets the global standards and price benchmarks for gold trading. “The shift to gold is about creating a more neutral portfolio in response to geopolitics.”
On the other hand, gold prices are notoriously fickle. As fear and panic ebb and flow, the price surge could prove to be temporary. And concerns over gold’s environmental impact — and the fact it has no role in the energy transition, unlike other metals — could also damp its prospects in the long term.
Gold is having its moment, but how long will it last?
The fear index
A primary motivator for gold’s resurgence is concern about the reliability of other liquid assets.
As markets have become more volatile in recent months, investors have been turning to gold anew. Since November, gold has gained a fifth to trade just below $2,000 per troy ounce after the collapse of three regional US banks and the takeover of Credit Suisse by UBS.
“Gold is indicating that there’s a high degree of fear in financial markets,” says Ross Norman, chief executive of Metals Daily, a precious metals data provider. “It’s a bellwether and the bell is ringing.”
For some, this is validation of long-held beliefs on the security of the global economy. David Franks, a modern-day gold bug, holds more than £2mn in bars, coins and mining stocks but has otherwise steered clear of investing in the equity markets.
The UK-based restaurant owner says the scale at which governments printed money after the 2008 financial crisis to return economies to health made his investment choices a no-brainer.
“At some stage, the world will wake up to America having debt way beyond its means. I don’t see any other answer than gold or silver,” he says. “If you have held it since 2008, it hasn’t done exceptionally well. I’m reassured one day, perhaps before I die, that it will do well.”
His fears over a lack of other investable asset classes resonate beyond the bullion vaults that deal with customers prone to thinking in terms of crisis and catastrophe. Such concerns are accentuated as the US debt ceiling negotiations look set to go to the wire again this month.
Janet Yellen, US Treasury secretary, has warned of financial and economic catastrophe if Congress does not agree to raise the federal debt limit by the start of June, which would raise the possibility of the first ever default on Treasury debt.
Mark Bristow, who leads Barrick Gold, the world’s second-largest gold producer, agrees with Franks. The central banks of the world have run out of options, he argues, the inflation genie is out of the bottle and emerging nations face the risk of a US dollar debt spiral.
“The harsh reality is when you have more debt than GDP, there’s only two ways to get out of it: have a major financial correction or grow your way out. We can’t grow out of this,” he says. “The only way out is a hard global landing.”
Distrustful of dollars
Beyond individual investors, the rise in gold has, in part, been driven by a global shift away from the almighty dollar.
Since the 2008 global financial crisis, there has been a clear push to diversify reserve currencies: the US currency’s share of global foreign exchange reserves has slid from more than 70 per cent in 2000 to less than 60 per cent today. That tectonic shift has been led by Russia, China, Turkey and India. “A lot of countries have understood that the dollar was a weapon, serving the US,” says de Montessus of Endeavour Mining.
For Russia, the west’s sanctions have only increased its reliance on gold, which it also mines domestically. When the global financial crisis struck in 2008, Vladimir Putin praised Russia’s gold and hard currency reserves as the “safety cushion” for the Kremlin to ease economic pain for millions of Russians.
Three years later, the Russian leader toured the depository at the central bank in downtown Moscow, flexing a gold bar weighing more than 10kg. At that time, Russia’s central bank was in the early stages of quietly increasing the share of the precious metal in its international reserves. Today gold accounts for about 25 per cent of Russia’s $600bn in reserves — rising almost sixfold in tonnage terms since 2007.
As countries search for alternatives to the dollar, a key question is what role gold will play in Beijing’s plans to internationalise the renminbi. In December, Xi Jinping touted settling payments for Saudi oil and gas in renminbi — which analysts say will only gain traction if it can be converted into gold. “Gold is re-entering the world system in terms of payments,” says Paul Wong, market strategist at Sprott Asset Management.
The People’s Bank of China has the largest foreign exchange reserves in the world at about $3.2tn and has reported adding gold for six months running — although many in the gold industry suspect the level of buying has been higher than officially reported figures.
This could help China challenge the US currency, says Oliver Ramsbottom, partner at McKinsey. “China’s sustained gold purchases could be interpreted as part of a long-term policy to loosen capital controls thereby increasing the renminbi’s challenge to the US dollar.”
Economies in distress, typically heavily indebted in US dollars, are also turning to gold. Before its default in December, Ghana, the world’s sixth-largest gold producer, proposed paying for oil imports in bullion — not dissimilar to the medieval barter trade of gold for salt between Mediterranean economies and west Africa. Another mining nation, Zimbabwe, is launching gold-backed digital tokens in an effort to prop up its inflation-stricken currency.
After the gold rush
While gold enjoys its moment to shine, it is hard to predict how long this rally will last.
Precious metal price forecasters are sometimes compared with those who sit in the fold-down seat facing backwards in London taxis — they can only see what has come, not what is ahead.
That is, partly, because $12tn of gold sits above-ground with supply increasing at a 2 per cent rate last year, putting an outsized focus on demand push-and-pull factors that work in complex and unpredictable ways. Gold prices collapsed from a high of $1,920 per troy ounce in 2011 after the financial crisis to nearly $1,200 two years later.
In the near term, the key factor determining gold prices will be the path taken by the US Federal Reserve to balance keeping the economy healthy and getting inflation under control. That will be pivotal for whether asset managers join retail investors and central banks in piling in for bullion, after 10 months of outflows for gold-backed exchange traded funds until March.
Fed officials signalled last week they would not be deterred from further interest rate rises to tackle inflation after market expectations of a pause had been rising, causing gold to ease off to about $1,970 per troy ounce as higher rates raise bonds’ attraction relative to non-yielding bullion.
Success in bringing down rising prices from April levels of 4.9 per cent to the Fed’s target of 2 per cent would further damp enthusiasm for gold, a hedge against inflation. An agreement on the US debt ceiling could also put downward pressure on bullion prices.
Longer term, consumer appetite for the precious metal may be depressed by the state of the gold mining industry itself — especially as it comes under greater pressure to lower emissions, reduce environmental impact and become more transparent.
“We are now firmly in a world that is decarbonising,” says Tom Palmer, chief executive of Newmont Corporation, the world’s largest gold miner that sealed a $19bn deal for Australian rival Newcrest this month.
He expects this will drive more mergers in the gold mining industry, as companies need longer-life mines to meet their climate targets and environmental goals. “We are in an industry that is consolidating.”
Gold, one of the least reactive elements, has little direct role in the energy transition, unlike many other more functional metals. But its deposits are often found alongside copper, which is crucial for low-carbon technologies such as wind turbines, electric cars and power transmission lines. Only 8 per cent of gold is used in applications such as technology, medicine and industry — the rest is mainly for jewellery and investing.
That is not lost on gold mining industry executives, many of whom are trying to increase copper production. “If I were to get in the time machine and go forward 10 years, I think a lot of gold companies will be producing copper,” says Palmer.
However, the shift towards a low-carbon world works against gold miners too: a growing cohort of researchers are calling for gold mining to be curtailed because of its environmental impact.
A recent paper led by Stephen Lezak, a researcher at the Scott Polar Institute at the University of Cambridge, found that the carbon footprint of extracting gold was at least as much as all intra-European aviation, and says global demand can mostly be met by recycling.
“When you think of gold, you think of this clean, pure, luxurious substance. Nothing can be more at odds with the reality of how gold is produced,” says Lezak, who points to impacts such as mercury emissions, water use and carbon emissions. “It’s easily replaceable and massively harmful.”
Swissaid, an NGO, accused gold refineries of being reluctant to disclose which mines they sourced from because of human rights and environmental concerns in a report released in March.
While many gold executives argue they improve the quality of life for local communities by providing jobs, and are reducing their environmental impacts, concerns over sustainability are set to grow in coming years.
This may not improve gold’s reputation among younger investors, who are likelier to be lured by digital investments such as NFTs or crypto.
Although the industry-funded group World Gold Council is working on plans to set up a gold-backed stablecoin, Andreas Habluetzel, chief executive of Degussa Goldhandel, a European gold dealer, believes that the digitisation and generational challenges will limit gold’s ability to rally further.
“In Europe, the younger generation are not really into gold. I don’t think we have a lot of chance for upside,” he says. Despite the collapse of the crypto exchange FTX, he rues that “trust is back and crypto will have a future place as an asset class”.
Crypto enthusiasts do at least have one thing in common with gold bugs: sympathy for the idea that the fiat currency system is broken, and headed for catastrophe. While risks remain present in the global economy, and as equities and bonds have shown signs of reversing their 20-year pattern of rising simultaneously, many will continue to put their faith in a weightier investment.
“It’s hard to push back against an asset with a 5,000-year history of providing wealth,” says Metals Daily’s Norman.