In a hi-tech world of cryptocurrencies and artificial intelligence, investors and central banks are investing heavily in a currency from the ancient world. It is helpful to understand the causes
A quarter of a century ago, as the new millennium started, globalisation was nearing its peak. The cold war was over, China was admitted into the World Trade Organisation and free trade and fairly free movement of people were encouraged. The ancient currency of gold seemed antiquated. The US dollar had come off the gold standard in 1971. The proportion of central bank reserves held in the form of gold fell from 40% in 1970 to 6% by 2008.

Many central banks, most notably in the UK, began selling their gold reserves in order to diversify assets and seek better returns. This prompted an international agreement known as the Washington Agreement on Gold, in which leading central banks agreed an annual cap on gold sales.

Since then, the precious metal has been seen as the ultimate safe haven, rising in price as inflation increases and geopolitical risk is heightened. The trend towards disposing of gold began to be reversed with the financial crisis of 2008. Since 2022, when inflation peaked in much of the world and the Russia-Ukraine conflict escalated, the gold price rose, although not immediately. It is revealing to look at when, and why. For a year, the price remained almost stable. The rise between the beginning of 2021 and mid-2023 was from just under $1,900 an ounce to $1,960 – a gain of just 3%.

Since 2024, however, it has soared, reaching around $2,900. What this indicates is that there is more going on than the traditional investors’ hedge of switching to a safe asset. Normally, gold prices move in inverse correlation to yields on government bonds, but around 2021 that relationship broke down: Gold continued to appreciate as yields increased.

Underlying causes are more than cyclical economic risks, and are related to declining trust in the US as a trading partner, declining confidence in the dollar, and a partial fragmentation of the global trading system, which may be temporary or the start of a more substantial long-term trend.

The global moves towards free movement of trade and people early in the century are going into reverse. The US President Donald Trump is imposing tariffs and preparing to deport undocumented immigrants. He is threatening towards emerging economies should they move away from trading in the US dollar. His policies are likely to increase inflation in the US, and the public sector debt and deficits are likely to persist at high levels. By reneging, or threatening to renege, on free trade deals such as those with his neighbours Mexico and Canada, he weakens trust in international agreements.

Central banks, notably including those of China, India, Turkiye, and GCC countries have been buying gold. Net purchases by central banks were over 1,000 tonnes in both 2022 and 2023. The proportion of central bank reserves held in gold has reached 11%. Around two thirds of family offices have invested in gold.

Many buyers want to possess the bullion in their vaults, rather than rely on contractual obligations, which could be subject to future restrictions such as sanctions. A significant proportion of the world’s gold is held in London, and there is a waiting time of between four and eight weeks to withdraw physical gold. This followed a surge in shipments to New York, where traders have amassed a stockpile worth over $80bn. Ordinary consumers in the US and elsewhere have been buying gold in one-ounce bars from retail outlets.

There is another factor. Gold is easily transportable, and can be melted and reshaped leaving little trace. It is therefore relatively easy to smuggle, and as such is well positioned for avoiding sanctions.

Since the major currencies came off the gold standard in the 1970s, they have become fiat currencies – the Latin term fiat means ‘let it be done’. Currencies are not based on a tangible commodity, but rely on trust. This begins to fray when there is heightened inflation and debt, trade wars and breaches of treaties. The global economy now features all four. It is human nature in these circumstances to resort to trade or invest in tangible assets.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.