Calvin Wang| May 6, 2024
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The stock market has been setting record highs lately, mostly from the hype around AI and what it’ll potentially do to every industry there is. There’s something else that’s had record highs recently as well, and that’s gold. Why?
Gold investment usually isn’t viewed well. Like most precious metals, gold value is highly volatile, which means that it can drastically change very quickly. Gold is mostly seen as a way to diversify your investment portfolio. It’s also seen as a safe haven during economic downturns, since it’s a “hedge” to inflation. Gold value typically benefits from higher inflation. Its value usually goes up when the value of the USD goes down. Because of this, many people tend to invest in gold during times of economic turmoil.
After the US abandoned the gold standard in the 1930s and World War II ended, the USD became the most powerful world currency. It’s currently the world’s principal reserve currency and the most used currency for international trade. The power of the US dollar has gotten America out of some tight spots, and its dominance also means that the US doesn’t have to worry too much about the 24,967 billion dollars of debt it’s in; it just gives treasury bonds to the creditors.
This sudden surge in gold is worrying. Even though the US market isn’t doing too well right now in the people’s eyes, it honestly could be worse. Inflation rates seem to be lowering slightly, and the market has been doing well.
There’s also been no signs of a gold rally from the people. Common signs when gold is invested in by people also aren’t there. Demand in gold hasn’t drastically increased, so what’s up with the surge in value?
The reason is likely geopolitical. Since gold is so volatile, it’s also incredibly affected by world politics. If you didn’t know, many Chinese central banks have started buying up gold. China has been straying further from buying federal treasury bonds, a bad sign for the US. The US is around 800 billion dollars in debt to China. When the US was on better terms with China, China would offload this debt by buying up US treasury bonds. Now, it looks like China is looking for other places to invest their money in. Since 2022, the People's Bank of China has added more than 300 tons of gold to its reserves, and there’s likely more that hasn’t been reported.
Even with China buying up all that gold, it still doesn’t make that much sense for gold to surge that much. Which leads me to believe there’s likely more private investing in gold from other countries. China buying up gold is likely a way to distance themself from the US and undermine the power of the USD. China doesn’t want the USD to be the central currency, but they realistically know that the world currency will never be the Chinese renminbi. This means that China may be getting its allies and other people who don’t favor the USD to buy up gold.
So does that mean they want a return of the gold standard? The problem before with the gold standard was that it was too stiff. With so much interaction from so many different nations, gold simply wasn’t flexible enough to support the economy. However, gold is unique in that it isn’t tied down to any other country. Which may be exactly what China and other nations are looking for.
In my opinion, I doubt that there's any real threat the gold standard will return. However, China and other countries no longer buying US treasury bonds is definitely a real threat for the US given how much debt we have. We can only wait and see what will happen.
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