Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. I'm Stephen Carroll, and
Speaker 1: this is Here's Why, where we take one new story
Speaker 1: and explain it in just a few minutes with our
Speaker 1: experts here at Bloomberg. In a world of increasingly complex
Speaker 1: ways to invest your money, it's easy to forget that
Speaker 1: one of the most trusted assets is still a metal
Speaker 1: dug out of the ground.
Speaker 2: Gold continues to go from strength to strength once again,
Speaker 2: all time records highs.
Speaker 3: Heading towards recession by some of this rock.
Speaker 1: Was it just gold for everyone?
Speaker 2: Yeah, it certainly seems that way.
Speaker 1: We see four things. Stocks go down, bonds go down,
Speaker 1: the dollar goes down, and gold goes up. During the
Speaker 1: market turbulence that's followed Donald Trump's return to the White House,
Speaker 1: gold has shone more brightly than ever. Investors seeking refuge
Speaker 1: from wild swings in stocks, bonds, and currencies have put
Speaker 1: gold prices to record after records. Not everyone's a fan, though.
Speaker 1: Here's legendary investor Warren Buffer speaking at Berkshire Hathaway's annual
Speaker 1: meeting in two thousand and five.
Speaker 3: I don't see gold as a store of value. And
Speaker 3: it's the truth is, it hasn't worked very well, turning
Speaker 3: out about three or four thousand tons of gold a year.
Speaker 3: And you know, we take it out of the ground
Speaker 3: in South Africa and we put it in the ground
Speaker 3: at Fort Knox or someplace New York, vin and it
Speaker 3: doesn't do much along the way for anybody.
Speaker 1: And yet gold's appeal hasn't faded in the twenty years
Speaker 1: since it's actually increased. Here's why investors can't get enough
Speaker 1: of gold. Our precious metals reporter Jack Ryan joins me
Speaker 1: now for more. Jack, first of all, remind us why
Speaker 1: is gold considered a safe haven.
Speaker 2: I think I should start by saying that most financial
Speaker 2: assets derive their value from the future income stream they're
Speaker 2: going to grant you. So you buy a bond, it's
Speaker 2: for the future income stream. You buy a share, it's
Speaker 2: for a share of the future profits, and you're ultimately
Speaker 2: relying on your counterparty to deliver on that. And so
Speaker 2: when you enter environment like we've seen over the last
Speaker 2: few weeks and months, where the future becomes very uncertain,
Speaker 2: you might start to question your counterparty's ability to do so.
Speaker 2: And then in that environment, gold becomes appealing because there
Speaker 2: is no counterparty, you're not relying on anyone else. It's
Speaker 2: just you and your gold. But then, of course, in
Speaker 2: reality it doesn't really work like that. There's also just
Speaker 2: the historical relationship of gold to various other assets during
Speaker 2: periods of market stress. When COVID broke out, it rallied.
Speaker 2: When Russia invaded Ukraine, it rallied. So the belief that
Speaker 2: it is a safe even becomes a reality and traders
Speaker 2: turn to it when markets run into trouble or due
Speaker 2: political tensions run high. I should say that when you
Speaker 2: get a severe sell off, gold does tend to get
Speaker 2: caught up on that in the short term because there's
Speaker 2: a dash for cash. Hedge funds have margin calls to meet.
Speaker 2: Gold is liquid, it's easy to sell. But then after
Speaker 2: those kind of periods of turbulence, then you start to
Speaker 2: see it. Right, So that's what you saw this month,
Speaker 2: and that's what you saw, for example, in the global
Speaker 2: financial crisis.
Speaker 1: Well, let's try to understand how this recent rally fits
Speaker 1: into historical trends. What does it tell us about investor
Speaker 1: sentiment at the moment.
Speaker 2: So the current rally has been really strong, you have
Speaker 2: to go fairly far back to find kind of parallels.
Speaker 2: You could argue after the global financial crisis in the
Speaker 2: years twenty nine twenty ten, gold had a similar performance,
Speaker 2: and then further back than that, I mean, the best
Speaker 2: time ever for gold was the nineteen seventies when you
Speaker 2: had stagflation actually across a lot of the West. That decade,
Speaker 2: Richard Nixon abandoned the gold standard and gold rose tenfold.
Speaker 2: So at the moment, there's some factors obviously moving in
Speaker 2: gold's favor. There's war in Europe, there's obviously dupolitical attentions
Speaker 2: across the Middle East. You have some people who believe
Speaker 2: that inflation is going to be structurally more elevated for
Speaker 2: the next couple of years than it's been for the
Speaker 2: last thirty years. And all of that, then combined with
Speaker 2: this trade war, all that stands to benefit gold.
Speaker 1: What do we know about who's buying gold?
Speaker 2: The most important driver of the rally has been central banks.
Speaker 2: Central banks hold gold in there foreign exchange reserve alongside dollars, euros,
Speaker 2: yen other assets. But basically the situation is rich countries
Speaker 2: that were part of the post war gold standard, so
Speaker 2: that Bretonwood system have a lot of gold. The US
Speaker 2: has nearly nine hundred billion dollars worth of gold. Germany
Speaker 2: has nearly half that, Italy has a lot, Switzerland has
Speaker 2: a lot, not so much the UK unfortunately, because a
Speaker 2: lot of it was sold about thirty years ago by
Speaker 2: Gordon Brown famously for about a tenth of the price
Speaker 2: it is now. But that leaves other developing economy central
Speaker 2: banks relatively underweight. So China, for example, has less gold
Speaker 2: and its official reserves than Italy. So in the last
Speaker 2: fifteen years central banks have been big buyers China, India,
Speaker 2: Poland the Czech Republic. They've all been adding a lot
Speaker 2: of gold. And that's actually sped up in particular since
Speaker 2: the invasion of Ukraine by Russia, because Russia's foreign exchange
Speaker 2: reserves held in euros held in dollars were free from them,
Speaker 2: and that I think woke up a lot of central
Speaker 2: banks around the world to the fact that their foreign
Speaker 2: exchange reserves, which were predominantly held in dollars and also
Speaker 2: in euros and pounds, were vulnerable to the long arm
Speaker 2: of European sanctions or US sanctions. But again, it's just
Speaker 2: you and your gold. If you are keeping your gold
Speaker 2: in a safe within your own territory, it can't be seized.
Speaker 2: It can't be taken. It's universally accepted, and so it's
Speaker 2: a way to diversify your risk and to bring some
Speaker 2: of your foreign exchange reserves out of the kind of
Speaker 2: long arm of some of the western countries.
Speaker 1: I'm just picturing this idea of people sitting in rooms
Speaker 1: full of gold now. But are there practical issues with
Speaker 1: holding gold? Given that? As he pointed out, one of
Speaker 1: the musual things about it is it's a physical asset.
Speaker 2: So there's a number of ways to hold it. I mean,
Speaker 2: for most the most practical way is probably through a
Speaker 2: gold back to ETF basically by a share in a
Speaker 2: fund that holds a big pile of gold. It's easy
Speaker 2: to buy, it's easy to sell. One drawback is that
Speaker 2: there are with it because you're paying someone essentially for
Speaker 2: storing the gold. Also, if you're some sort of doomsday
Speaker 2: prepper type of buyer, which there are plenty of in
Speaker 2: the gold market, you don't have direct custody over your gold,
Speaker 2: So if that's important to you. I always think, though,
Speaker 2: in a doomsday scenario, you're better off buying tinned food
Speaker 2: and guns.
Speaker 1: Because I don't know how doomsday you're preparing for.
Speaker 2: I don't know how useful really gold would be if
Speaker 2: everything goes wrong. You can also buy fifty thousand dollars
Speaker 2: half kilo bar from Costco or any other bullion dealer.
Speaker 2: Costco has become really popular. They charge gold shopping. Yeah,
Speaker 2: you can go gold shopping, but Costco charge about a
Speaker 2: two percent premium over the spot price. That's not bad,
Speaker 2: but then there's practical issues like security and then crucially
Speaker 2: reselling because obviously you'll go to a bullion dealer, but
Speaker 2: they might only offer you a couple of percent below
Speaker 2: the spot price. So again that's kind of a friction
Speaker 2: to buying and selling.
Speaker 1: We heard from Warren Buffet a little bit earlier talking
Speaker 1: about his views on gold and the question of what
Speaker 1: utility it really has and how it rates as a
Speaker 1: store of value. Is there many people that share his
Speaker 1: view on gold and the question of utility.
Speaker 2: I mean, I think he's right. Basically, it's not that useful.
Speaker 2: A small amount is used in technology. It has ornamental values,
Speaker 2: it's quite beautiful, has its distinctive color, it doesn't tarnish.
Speaker 2: It's very valuable, so it's good for jewelry it does,
Speaker 2: but its value, you know, three five hundred dollars an
Speaker 2: ounce is far in excess of its actual utility. What
Speaker 2: it does have going for it is scarcity. It's quite
Speaker 2: rare in the Earth's crust. It's quite difficult to get out.
Speaker 2: It has obviously historical importance, the cultural salience millennia of history,
Speaker 2: as a store of value, as something that has been
Speaker 2: perceived to be valuable, and so I guess you could
Speaker 2: say in some senses the use case is a bit
Speaker 2: like bitcoin, where you don't have a counterparty. As I
Speaker 2: mentioned earlier, Bitcoin obviously also requires some effort to mind.
Speaker 2: But the difference is that, I mean, gold has a
Speaker 2: track record of rising during periods of market stress, it's
Speaker 2: not massively volatile, and it has strong cultural importance in
Speaker 2: parts of the world economy that are growing very quickly,
Speaker 2: so China and India and Pakistan.
Speaker 1: What about the risk of a gold bubble? What could
Speaker 1: disrupt this rally that we've seen that's pushed gold to
Speaker 1: record high after record high.
Speaker 2: The fact that it's nearly been a unbroken line upwards
Speaker 2: since early twenty twenty four, some people in the market
Speaker 2: think that a pause or a period of consolidation might
Speaker 2: be likely. Some of the things that could be bearish
Speaker 2: for the price if you had major easing of the
Speaker 2: trade war, for example, any de escalation in major conflicts,
Speaker 2: so in particular the war in Ukraine. That could lead
Speaker 2: to a selloff if people perceived geopolitical tensions to be
Speaker 2: easing somewhat. But I think the thing that would do
Speaker 2: lasting damage, but it's really a tail risk, is if
Speaker 2: you had some of the large developed economy central banks,
Speaker 2: so the US, which has a lot of gold obviously,
Speaker 2: or Germany or Italy, if for whatever reason one of
Speaker 2: those countries decided to start selling their gold into the rally,
Speaker 2: for example, if they had a debt crisis or some
Speaker 2: other reason to do so, that would be extremely burish
Speaker 2: for the price. And any news or hints towards that
Speaker 2: I think would be very damaging to the price. And
Speaker 2: that was actually what drove gold's bear market through the
Speaker 2: nineteen nineties right up to two thousand. Everyone was selling
Speaker 2: their gold and the consensus was that gold is a
Speaker 2: relic and the smart thing to do is sell it
Speaker 2: and take dollars what you can. And that was the
Speaker 2: environment in which the UK sold its gold for such
Speaker 2: a low price. Central banks have been buying for the
Speaker 2: last fifteen years, that's been the key driver of price.
Speaker 2: I think the only thing that will really halt and
Speaker 2: reverse gold would be if that trend stops.
Speaker 1: Okay, Jack Ryan, our Precious metals reporter, thank you very much.
Speaker 1: For more explanations like this from our team of three
Speaker 1: thousand journalists and analysts around the world, go to Bloomberg
Speaker 1: dot com slash explainers. I'm Stephen Carroll. This is here's why.
Speaker 1: I'll be back next week with more. Thanks for listening.