Are We Returning to the Gold Standard?
The gold market has recently broken through significant multi-year resistance levels, fueled by a combination of global geopolitical tensions, asset bubbles, persistent inflation, and rising concerns over government and corporate debt levels. Gold, historically viewed as a safe-haven asset, remains undervalued in light of these growing uncertainties, signaling a potential for substantial price appreciation over the coming years.
Money and Trust
At its core, all money relies on trust. Since money is a social construct, it can take many forms—tobacco, salt, paper currency, digital entries, and more. As long as market participants accept it, it functions as money.
However, not all forms of money are created equal. Some, like commodities (tobacco and salt), are impractical in today’s economy. Others, like fiat currencies, carry counterparty risk since they are backed by central banks or governments. Gold, since the late 19th century, has stood out as a universally accepted store of value that carries no counterparty risk. This makes it a foundational asset in the global financial system, especially during periods of economic uncertainty.
The Hierarchy of Money
As previously discussed, Perry Mehrling’s hierarchy of money, Exter’s inverse pyramid, and the IMF’s asset rankings all place gold as the ultimate form of money, followed by fiat currencies, debt securities, equity, and derivatives. This hierarchy reflects the relative stability of assets, with gold at the bottom, underpinning the system. In times of financial stress, trust in credit weakens, and people turn to gold.
Throughout the business cycle, the upper layers of the pyramid (credit-based assets) expand, causing economic booms. During recessions, these layers shrink, leading to a rise in gold prices as trust in credit diminishes. Over time, the pyramid grows in size, but its shape fluctuates with cycles of debt expansion and contraction.
Gold and Debt Cycles
The ratio of gold to credit assets can indicate where we are in the debt cycle. Historically, when trust in credit falters, such as during World War II and the inflationary period of the late 1970s, gold’s value relative to financial assets rose to between 7-10%. Currently, gold represents just 3% of global financial assets, suggesting considerable upside potential as trust in credit wanes.
US Dollar and Gold
The value of the US dollar, as the world’s reserve currency, is supported by the country’s monetary gold reserves. The ratio of gold backing the dollar is currently rising from historically low levels, similar to those seen before gold bull markets in 1971 and 2000. This suggests that another multi-year bull market for gold may be unfolding.
Additionally, the dollar’s reserve status is being increasingly challenged, especially in light of geopolitical events such as the freezing of $300 billion in Russian assets during the Ukraine conflict and growing de-dollarization efforts by BRICS nations. Central banks, particularly in China, are buying gold at record levels, signaling a shift away from reliance on the US dollar.
Gold as a Hedge Against Currency Devaluation
Gold’s share of global international reserves is on the rise as trust in fiat currencies erodes. Central banks in countries like China have historically increased their gold holdings before significant price increases. Recent data suggests that central banks are again increasing their gold reserves, a trend that has coincided with currency devaluations and rising inflation expectations.
Gold has long been a reliable hedge against inflation. Historically, a rise in gold prices is often followed by inflationary pressures within one to two years. Given current global debt levels—now exceeding $313 trillion, or 330% of global GDP—gold is likely to play a central role in helping governments and central banks manage these unsustainable debt levels through inflationary policies.
Equity Bubbles and Gold
The US equity market, relative to GDP, is nearing a peak, suggesting that a correction may be imminent. Throughout history, equity bubbles have been fueled by easy money policies, which ultimately lead to currency debasement and higher gold prices. Central banks tend to overshoot monetary easing, creating a cycle of bubbles and devaluation, where gold becomes the preferred store of value.
The Future of Gold in the Global Financial System
Tensions between East and West, combined with growing distrust in fiat currencies, are likely to accelerate gold’s rise as a key reserve asset. Recent actions, such as the confiscation of Russian assets and China’s aggressive gold buying, suggest that the shift toward gold is already underway. With central banks and investment funds increasing their gold holdings, we are likely entering a period of sustained upward pressure on the gold price.
As the global financial system continues to adjust to structural changes, such as rising inflation, excessive debt, and geopolitical instability, gold’s role as a stabilizing force will only increase. The current debt cycle and equity market valuations indicate that the gold market is on the verge of a significant rally, supported by both central banks and private investment.
In summary, all indicators point to a new multi-year gold bull market as trust in fiat currencies erodes, and gold’s historical role as the ultimate store of value becomes more critical than ever.
Gold’s significance transcends its traditional role as a financial asset, playing a vital cultural and geopolitical role, particularly in BRICS nations—Brazil, Russia, India, China, and South Africa. These emerging economies see gold not only as a store of value but as a symbol of wealth, prosperity, and cultural heritage. In nations like India and China, gold has a long history of being revered for its spiritual, social, and economic importance, which fuels strong, sustained demand.
In India, gold is deeply integrated into the fabric of society, serving as a symbol of wealth and a crucial part of life’s major events. It is an essential element in religious rituals, weddings, and festivals like Diwali, where gold is believed to bring good fortune and prosperity. Gold also serves as a savings vehicle for many Indian households, passed down through generations. This cultural affinity has made India one of the largest consumers of gold globally, with strong demand for both jewelry and investment purposes. Although India’s central bank has not been as aggressive in accumulating gold reserves as some of its BRICS counterparts, the government has actively taken measures to boost domestic gold production and reduce dependence on imports, demonstrating the asset’s strategic importance.
In China, gold is similarly revered, symbolizing wealth, power, and social standing. This cultural regard drives significant demand for gold, both for personal consumption in the form of jewelry and as an investment. Chinese demand for gold has been further amplified by government policies and long-term strategies aimed at reducing exposure to the U.S. dollar. China’s central bank has been steadily increasing its gold reserves through domestic production and international acquisitions. While the full extent of China’s gold holdings remains undisclosed, analysts speculate that the People’s Bank of China has quietly built substantial reserves as part of its long-term diversification strategy. Gold is viewed as a vital hedge against financial instability, and China’s interest in using gold to support the internationalization of the yuan underscores its importance in the nation’s financial policy.
Russia has also emerged as a major player in the global gold market. The Russian central bank has been one of the largest buyers of gold in recent years, aggressively accumulating reserves to reduce reliance on the U.S. dollar and protect the economy from geopolitical risks. Russia is also one of the world’s top gold producers, giving it an advantage in expanding its reserves. The accumulation of gold is a key part of Russia’s strategy to buffer its economy from Western sanctions and assert greater financial independence.
Beyond individual countries, the BRICS nations collectively see gold as an asset of increasing geopolitical importance. As they seek to diminish the dominance of the U.S. dollar in international trade and financial systems, these countries have bolstered their gold reserves, viewing it as a secure, non-dollar asset. China has been especially vocal about its desire to elevate the yuan to reserve currency status, supported in part by gold reserves, which could challenge the dollar’s hegemony.
The multifaceted involvement of BRICS nations in the global gold market reflects a combination of economic, cultural, and strategic factors. As these nations gain greater influence on the world stage, their accumulation and use of gold are poised to play an increasingly significant role in reshaping the global financial landscape. By bolstering their gold reserves and promoting its use in international trade, BRICS countries are enhancing their financial security and challenging Western financial hegemony, signaling gold’s growing relevance in the evolving world order.
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