“‘A Harbinger of Conflict’: Why a Tense World is Turning to Gold”

“While these are … distinct efforts,” Mohamed El-Erian commented, “they can collectively begin to chip away at the absolute dominance of the dollar and the dollar-based payments system.”

Riding the Wave

The road to a global financial re-balancing is a long one. While central banks in advanced economies typically hold around 70 percent of their reserves in gold, BRICS nations hold just about 10 percent. The majority of their reserves remain in dollars, underscoring why these countries are likely to continue acquiring gold over the long term. Even when they pause purchases during periods of high prices — as we’ve seen recently with China’s central bank, the People’s Bank of China — the underlying trend does not appear to be changing anytime soon.

Meanwhile, private investors across the globe are not sitting idly by. As is often the case, they are reading central banks’ cues and making their own moves.

Historically, gold prices have moved inversely with central bank interest rates. When bond yields and savings account returns rose, gold prices tended to fall, as the metal doesn’t offer any income or yield. Yet this time around, the pattern has broken. Since 2022, gold prices have steadily climbed even as central banks raised interest rates. Now, with the Federal Reserve and European Central Bank beginning to cut rates, gold prices are accelerating even faster.

“In the past, we might not have paid much attention to this,” noted David Wilson, director of commodity strategy at BNP Paribas. “But it’s clear that central bank activity has had a psychological impact on speculative investors. When they see central banks buying gold, their reaction is: ‘We should be buying too.’”  

Data from the U.S. Commodity Futures Trading Commission shows this shift in investor behavior. Over the past year, the net volume of gold futures held by market participants — a rough indicator of speculative buying — has more than tripled. Interestingly, this surge has occurred despite a noticeable slowdown in central bank gold purchases this year. Investor interest in gold now sits just shy of record levels last seen at the onset of the COVID-19 pandemic.