Remember the BRICS – Brazil, Russia, India and China?
Back in the early 2000s, pundits predicted the countries in the group would reign supreme, economically speaking. President Putin hopes they still will – and he is not just talking about economics.
Last month, the Russian leader held a conference attended by top dogs from almost 40 countries, including China, Iran, India and a number of Arab states. For several days in Kazan, south-west Russia, Putin was in full flow, waxing lyrical about a ‘new world order’ to challenge the West.
One week earlier, in Miami, Florida, another conference took place, hosted by the London Bullion Market Association, the global trade body for precious metals. There, central banks from as far afield as Mongolia and Mexico spoke about the importance of gold as an investment.
The Chinese and Russian presidents, Xi Jinping and Vladimir Putin, at last month’s metting of the BRICS group of nations, at which Putin spoke of establishing a ‘new world order’
These events, thousands of miles apart, could not have been more different in tone and inclination. But both have big implications for gold.
Gold is unlike any other mainstream investment. Shares become worthless if companies go bankrupt. Property prices slump if landlords can no longer afford to own them. Bonds and currencies tumble when financial markets lose faith in the countries behind them. Gold carries none of those risks. Known as the ultimate safe-haven asset, gold is what investors turn to when stock markets are stumbling, bonds are in free-fall and property prices are sinking.
All-time high
In recent years, none of those factors have been much in evidence. Yet gold has been on the rise. At the turn of this century, gold was trading at just $276 (£214) an ounce. Today, it is flirting with $2,700 (£2,100) an ounce, an all-time high.
This year alone, gold has been the best-performing mainstream investment in the world, rising by more than 30 per cent. Even US shares could not keep up, increasing 21 per cent so far this year. And gold’s performance is not just a 2024 phenomenon. Over the past 20 years, gold has outpaced almost every market, delivering average annual returns of nearly 10 per cent and giving Wall Street a real run for its money in the process.
There are many reasons behind gold’s phenomenal performance. But perhaps the biggest clue lies with the world’s central banks, the institutions that are responsible for making sure countries are financially strong and stable. They do this by building up vast war chests of cash, bonds and gold. And in recent times, many of them have been on the hunt for gold, with Russia and China leading the way.
China under the radar
In 2000, the People’s Bank of China had less than 400 tonnes of gold. By 2010, that had more than doubled to 1,000 tonnes – and today China has stocked up on at least 2,250 tonnes of gold.
Russia tells a similar story, increasing its gold reserves more than six-fold to around 2,300 tonnes over the past two decades.
These are official statistics from the International Monetary Fund and other reliable sources. The real figures may be even higher. Central banks are supposed to report their purchases every month but some are better at doing this than others.
China has been buying hundreds of tonnes of gold over the past 18 months
In both 2009 and 2015, for example, the Chinese breezily revealed that they had been buying hundreds of tonnes of gold but simply had not mentioned it to the authorities. In May of this year, after 18 months of consistent buying, the People’s Bank said it was taking a breath – yet many market watchers believe President Xi Jinping continues to stockpile gold, just preferring to do so out of the public eye.
Chinese and Russian enthusiasm for the precious metal can partly be attributed to sound financial planning. In an unpredictable world, where stock and bond markets are volatile and economic conditions are uncertain, holding gold makes sense. And both countries still own far less gold than their arch-rival America.
The US leads the pack on the gold front. Not only does its central bank, the Federal Reserve, own more than 8,000 tonnes of gold, but the precious metal accounts for almost three-quarters of America’s official store of assets. In other words, the Fed’s stock of gold dwarfs its holdings of bonds, dollars and sundry other currencies.
The People’s Bank of China, by contrast, has little more than 5 per cent of its vast hoard of assets in gold so it could continue buying for years before coming close to the United States.
But China, Russia and other attendees at Putin’s bash last month are not just buying gold for financial reasons – political machinations are also at play. Ever since the end of World War Two, the US dollar has been the world’s most important currency. At least half of global trade is conducted in the greenback and it is known as the number one ‘reserve currency’, meaning it is held in vast quantities by central banks across the globe.
Putin and Xi Jinping would like to change US dominance and create that ‘new world order’. They are not alone. When Russia invaded Ukraine nearly three years ago, the West moved fast to freeze Putin’s overseas assets and shut him out of global payment systems. He had been stockpiling gold and selling dollars for years but even he may have been surprised by the speed and extent of Western financial manoeuvres. Other emerging market countries were certainly spooked.
More gold please
In 2021, before the Ukraine war, central banks bought 460 tonnes of gold. In 2022 and 2023, purchases rocketed to more than 1,000 tonnes and are on track to exceed 800 tonnes this year. Emerging market countries, including China and India, led the charge, driven by a desire to reduce dependence on the US dollar and ensure they are better able to defend themselves if the West decides to freeze them out of financial markets.
A recent survey from international trade body, the World Gold Council, highlighted central bank concerns. They are worried about global instability, worried about financial risk and keen to have a broad spread of investments. So much so that two-thirds of central banks from emerging market countries said gold will account for a bigger share of global reserves in five years, while the dollar’s role will decrease.
These banks are not just buying more gold but keeping it closer to home as well. The Bank of England and the Federal Reserve are the traditional keepers of central bank gold, storing thousands of tonnes for countries from across the world in highly secure underground vaults. Recently, however, countries such as India have decided to bring it home. India claims the move makes no difference. Others disagree, suggesting central banks that repatriate precious assets are keen to make sure they cannot be seized in a crisis.
Why gold dipped with Trump
Donald Trump’s re-election as US President is likely to make fretful central banks even more unsettled, with his bold vows to impose tariffs on all imports, particularly those from China, and breezy assertions that he can fix the Ukraine war ‘in a day’ and bring peace to the Middle East.
China is already wrestling with lower economic growth than in the past. Now there are Trump’s tariff threats to handle, which could cause huge problems if and when they are enacted. Other Asian countries are likely to be in Trump’s firing line too, even if he has focused his rhetoric on Xi Jinping and the People’s Republic.
Donald Trump’s election as US President has made banks unsettled… but, while the price of gold recently dipped, it was by only 2 per cent and is not expected to be a long-term trend
Rhetoric can be expensive, however. In the year to September 30, 2024, the US government received revenues of £4.92trillion but spent $6.75trillion, resulting in a deficit of $1.83trillion, the third highest on record. Trump’s plans are likely to send that figure even higher, which could mean higher inflation and higher interest rates.
Gold does not pay dividends or interest so it often suffers when government bonds offer generous rates of interest. When news of Trump’s landslide emerged therefore, gold dipped – but only by 2 per cent. Looking ahead, that could well be a short-term blip. Inflation makes bonds less valuable over time and eats away at cash too. Gold is an ideal hedge against the inflation demon, one of the reasons that conservative financiers like it so much.
Gold also holds its value against cash and, if Trump sends US debt levels soaring, that could weaken the dollar.
Putin has gold in his sights
Putin’s attempts to redraw the political map, steering power from West to East, may bode well for the gold price too. Reports suggest that he and his allies are looking for another currency to replace the dollar in international transactions and gold is in their sights.
Attendees at that Miami conference believe gold will top $2,900 an ounce by this time next year, representing a rise of 7 per cent from today’s level – and, according to attendee Suki Cooper from Standard Chartered bank, central banks’ ‘appetite to buy remains strong’.
The World Gold Council’s Joe Cavatoni also believes international demand will remain high, while Goldman Sachs expects gold to be changing hands at $3,000 by the end of next year, pointing out that gold may offer protection against potential geopolitical shocks and debt fears.
With uncertainty rising across the world, experts say now is a good time to invest in gold
BullionVault allows investors to buy and sell gold online. Its head of research Adrian Ash is, perhaps unsurprisingly, optimistic about gold’s prospects.
‘It’s always a good time to buy gold!’ he says. ‘Uncertainty, volatility and geopolitical risks are rising, and not just because of the US election. For new investors, the price you missed doesn’t matter. What counts for today’s buyers is what gold’s track record says it could do when the next crisis strikes.’
That does not mean sell everything and pile into gold. Central banks do not follow that mantra and ordinary investors should not either. But it could make sense to add a chunk of gold to your investments, on top of shares and bonds.
Advice varies as to how much but extensive analysis suggests that allocating 5 to 10 per cent of your portfolio to gold should act as a shield in difficult times. And with macho leaders strutting the stage both East and West, a shield may be just what investors need.
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