Weak dollar? Yes.
Global political uncertainty? Yes.
Cloudy economic outlook? Yes.
All factors in the amazing strength we’ve seen in the gold price this year.
But there’s an even bigger factor that underpins them all: the ongoing transfer of financial power from west to east.
No one doubts now that it’s happening. But how exactly?
A key answer to that question is via gold.
It’s no coincidence that the gold price has risen markedly in conjunction with an unprecedented bout of central bank purchasing. In each of the past three years central banks have purchased more than 1,000 tonnes of gold between them, up markedly on levels seen earlier in the decade. In 2020, central banks purchased just 254 tonnes of gold, although it was up and down in the years prior to that.
China, India and Russia have all been big buyers over the past few years, although Russia, as we known, has its issues, and has also been at times.
Russia’s particular issues though, aren’t an exception. They are a central factor in what’s been going on. Consider that it’s been three years since Russia invaded Ukraine, and that it’s been three years since central bank gold purchases jumped by more than 60% to their current levels.
These two apparently separate global events are in fact intricately linked.
Because the western response to the invasion of Ukraine by Russia was, as we know, to weaponize the financial system. Some voices were raised against the move to shut Russia out of the global financial system, but amidst all the self-righteous clamour and flags in bios, those voices were drowned out.
And the effect has been straightforward. Central banks, whether acting for benign or malign regimes have alike taken a good hard look at their own financial security. If billions and billions of dollars of Russian assets can simply be seized and sequestered by countries with which Russia isn’t even officially at war, what does that say about the integrity of the system in which those assets were held?
The Western liberal view is, of course, that these confiscatory and exclusionary actions were morally justified.
But every other central banker in the world has suddenly had to face questions from his or her respective political masters – are our own assets safe from Western sequestration? The unsettling answer has been a resounding ‘no.’
So, how to make them safe?
In the absence of a system yet able to be anchored in the Chinese currency, the obvious answer is: gold. So, the central banks have piled in.
To put it another way, trust – a key element in any financial system – isn’t what it used to be as far as the Western world is concerned.
No surprise, then, to see that the big buyers are not the western countries, who will tend to think their own financial system remains viable. No, the big buyers of gold are China, India, Kazakhstan, Poland, Turkey, Azerbaijan, Russia and Iraq. You can bet Brazil and Saudi Arabia are watching developments pretty closely too.
So, what does this mean?
First, and most obvious, a significant transfer of wealth away from the West. As a market, gold may be dwarfed by oil, but nevertheless it does have a permanence that oil lacks. It can underpin other financial activity. The more gold that moves into vaults away from the West, the more the comparative financial strength of the West declines.
Weaponising the financial system was a card the US could play only once. It’s played it, and now other countries will move away from the US financial system. More workarounds will develop and gold may not be central in the decades ahead. But it will be for the foreseeable future. That’s why, when the profits were taken, the price dropped only to around US$4,000, and showed no sign of returning to where it was at the start of this run.
The losers, then?
Holders of the US dollar and other fiat currencies – losers for many reasons. This gold price strength is a sign of a weaking of US financial hegemony.
The winners?
Anyone currently mining, or exploring for gold. The exploration angle is a bit more abstract. But the mining side is clear enough. Most of the costs in mining are sunk. So every dollar added to the gold price goes straight to profit.
So big miners like Newmont and Barrick will be rolling in cash, swamped by an embarrassment of riches. Unlikely that they’ll want to hold onto their piles of dollars for long, of course. Instead, there’ll either be mergers and acquisitions aplenty, or massive payouts to shareholders, or both.
Who will be the next target? Kinross? Agnico Eagle? Northern Star? Alamos? Or will it be Barrick and Newmont themselves? – both companies have recently had a change in top management and some have speculated that these corporate changes might be clearing the decks for a potential merger.
Further down the scale, mid-tier and junior gold companies will benefit too. Producers, like Caledonia Mining (CMCL), Greatland (GGP), Anglo-Asian (AAZ), Ariana (AAU), Thor Explorations (THX) and Pan African (PAF) will be enjoying those bumper margins, supported by strong track records of production and supportive investors.
And explorers and developers, like Kavango (KAV), ECR (ECR), Wishbone Gold (WSBN) and First Class Metals (FCM) are also likely to benefit, as investor sentiment swings their way, and speculation mounts about who will deliver the next really big gold project.