Gold's Resurgence: A Safe Haven in a Turbulent World

As the global economy grapples with rising uncertainty, investors are flocking to gold as a safe haven asset. The metal has surpassed the euro to become the world's second-largest reserve asset among central banks, passing a record buying spree. Central banks hold gold as a kind of rainy day fund to see themselves through periods of economic turbulence, and they are not looking to invest with assets that provide an outsized return, but rather those that will hold their value in a crisis, and be easy to sell.

Key Takeaways:

• Gold has surpassed the euro to become the world's second-largest reserve asset among central banks, with net purchases exceeding 1,000 tonnes each year for the past three years.
• The increasing prominence of gold in central bank reserves reflects the rise of emerging markets, particularly China, India, and Turkey.
• Central banks' gold holdings are nearly on par (in tonnage terms) with the previous peak in 1965, during the Bretton Woods era.
• The value of gold surged to a record intraday high in April in real terms, passing the previous record set in 1980.
• Since Trump took office, gold has been the best performer among asset classes, including equities, energy, and major currencies.
• The recent rally stands out for its sheer ferocity, particularly at a time when high-tech competitors such as bitcoin are also on the march.
• The dollar's status as the de facto reserve currency is being undercut by Trump's policies, leading to a reassessment of exposure to dollar assets.
• Gold's comeback is seen as a "grand portfolio shift", where possibly some central banks are derating the level of dollars they have, but not moving out of them.

Statistics:

• Net inflows into gold-backed exchange-traded funds were 322.4 tonnes during the first five months of the year, the highest levels since the pandemic.
• The gold price has risen about 30% this year, reaching a record intraday high in April.
• Central banks hold a total of 32,700 tonnes of gold, worth around $1.6 trillion.
• The biggest growth in gold holdings has come from emerging-market countries, including China, India, and Turkey.
• The dollar's value slumped to a three-year low against peers, including the pound and the euro, this week.
• The US government's budget bill will add $2.4 trillion to US debt levels over the next decade.

Sources:

• "Gold's rise in part reflects the [Trump] government's undermining of the properties underpinning dollar dominance" - Mark Sobel, a former US Treasury official and US chair of the think-tank OMFIF.
• "Gold is the ultimate confusion trade," says Luca Paolini, chief strategist at Pictet Asset Management.
• "People often say bitcoin is the new gold. I say, 'No, gold is the new gold,'" quips Kenneth Rogoff, a Harvard professor and former chief economist of the IMF.
• "Gold is a 'comfort metal'," says Randy Smallwood, chief executive of Wheaton Precious Metals, a mining royalty company.