There is fear in the air, and what do people do when they are frightened? They buy gold.
On Wednesday, the price of the metal hit an all-time high, topping $3,578 an ounce. That’s compared with $2,658 at the start of January, so up 35 per cent this year.
Goldman Sachs thinks it could go well past $4,000 by the middle of 2026, and approach $5,000 if as little as 1 per cent of the private funds invested in US Treasury securities were switched to gold. There have been surges in the gold price before, but this is huge.
It is huge because the biggest driver of this rise seems to be central banks, especially in the big emerging economies, notably China and India.
According to Reuters, the People’s Bank of China has bought 21 tons of gold so far this year. Last year it bought 43 tons and in 2023 it purchased 221 tons, bringing its total to 2,260 tons.
The Reserve Bank of India has also been a big buyer and has 865 tonnes. To put that in perspective, the UK now has only 305 tons.
Back in the 1950s we had about 2,500 tons of gold reserves but they were run down in the 1960s, mostly by the Labour government in a failed effort to prevent devaluation of the pound, so by the late 1970s we had just 700 tons.
Those holdings were halved by Gordon Brown’s gold sales between 1999 and 2002, at an average price of $275 an ounce.
This sad story makes us look pretty stupid as a country, and helps explain why our governments in general – Labour ones in particular – are not much trusted by international markets to make good financial decisions.
I am afraid sterling does not have a great reputation, which is why our Government has to pay a higher rate of interest to fund the national debt than any other major developed country. But the new element now is that trust in the US, and specifically in the dollar, is weakening, too.
After all, when central banks buy gold they have to sell something, and mostly it will mean dollar-denominated US Treasuries.
They are saying they would rather hold an asset that pays no interest, but which has a history over the past 2,500 years of being both a store of value and a medium of exchange – the first gold coins were issued by King Croesus of Lydia (now part of Turkey) around 550 BC.
I can see why. You may believe, as the economist John Maynard Keynes declared, that gold is ‘a barbarous relic’.
But ask yourself this: do you think that the dollar, or indeed Bitcoin, will be around in another couple of millennia?
So what does all this mean for the rest of us? It isn’t helpful to speculate about all the things that might go wrong in the coming months and years that would endorse this surge in the gold price: a collapse of the dollar, another bout of double-digit inflation worldwide, and all that.
Nor does it get us anywhere to predict that the price will go to $5,000 an ounce or more, because no one can possibly know.
What is worth saying is gold is expensive now relative to its historical value. You can see this by looking at the price of a gold sovereign.
Back in 1913, before the First World War, it was worth a pound – it was a pound. According to the Bank of England’s inflation calculator, it would now take £100.36 to buy £1 of goods and services then. Prices have risen 100-fold.
But to buy a sovereign now costs £650. There’s a premium on sovereigns over other forms of gold partly because they are collectors’ pieces, but also because they are legal tender and hence exempt from capital gains tax.
Even allowing for that, the present gold price is high. If Gordon Brown chose a particularly bad time to sell gold, this is probably not a very good time to buy it.
Two other things are worth noting. One is how even modest inflation whittles away the real value of money. Since 1997 prices in the UK have doubled. I would guess that in another 25 to 30 years they will at least double again.
The other is that if you are really frightened of inflation, by all means buy some gold, but you will probably do better to have other real assets, such as houses and shares. And, above all, spread your risk.
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