WEBVTT - Here’s Why Investors Can't Get Enough of Gold

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio news. I'm Stephen Carroll, and

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<v Speaker 1>this is Here's Why, where we take one new story

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<v Speaker 1>and explain it in just a few minutes with our

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<v Speaker 1>experts here at Bloomberg. In a world of increasingly complex

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<v Speaker 1>ways to invest your money, it's easy to forget that

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<v Speaker 1>one of the most trusted assets is still a metal

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<v Speaker 1>dug out of the ground.

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<v Speaker 2>Gold continues to go from strength to strength once again,

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<v Speaker 2>all time records highs.

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<v Speaker 3>Heading towards recession by some of this rock.

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<v Speaker 1>Was it just gold for everyone?

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<v Speaker 2>Yeah, it certainly seems that way.

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<v Speaker 1>We see four things. Stocks go down, bonds go down,

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<v Speaker 1>the dollar goes down, and gold goes up. During the

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<v Speaker 1>market turbulence that's followed Donald Trump's return to the White House,

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<v Speaker 1>gold has shone more brightly than ever. Investors seeking refuge

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<v Speaker 1>from wild swings in stocks, bonds, and currencies have put

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<v Speaker 1>gold prices to record after records. Not everyone's a fan, though.

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<v Speaker 1>Here's legendary investor Warren Buffer speaking at Berkshire Hathaway's annual

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<v Speaker 1>meeting in two thousand and five.

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<v Speaker 3>I don't see gold as a store of value. And

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<v Speaker 3>it's the truth is, it hasn't worked very well, turning

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<v Speaker 3>out about three or four thousand tons of gold a year.

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<v Speaker 3>And you know, we take it out of the ground

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<v Speaker 3>in South Africa and we put it in the ground

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<v Speaker 3>at Fort Knox or someplace New York, vin and it

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<v Speaker 3>doesn't do much along the way for anybody.

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<v Speaker 1>And yet gold's appeal hasn't faded in the twenty years

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<v Speaker 1>since it's actually increased. Here's why investors can't get enough

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<v Speaker 1>of gold. Our precious metals reporter Jack Ryan joins me

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<v Speaker 1>now for more. Jack, first of all, remind us why

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<v Speaker 1>is gold considered a safe haven.

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<v Speaker 2>I think I should start by saying that most financial

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<v Speaker 2>assets derive their value from the future income stream they're

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<v Speaker 2>going to grant you. So you buy a bond, it's

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<v Speaker 2>for the future income stream. You buy a share, it's

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<v Speaker 2>for a share of the future profits, and you're ultimately

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<v Speaker 2>relying on your counterparty to deliver on that. And so

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<v Speaker 2>when you enter environment like we've seen over the last

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<v Speaker 2>few weeks and months, where the future becomes very uncertain,

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<v Speaker 2>you might start to question your counterparty's ability to do so.

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<v Speaker 2>And then in that environment, gold becomes appealing because there

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<v Speaker 2>is no counterparty, you're not relying on anyone else. It's

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<v Speaker 2>just you and your gold. But then, of course, in

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<v Speaker 2>reality it doesn't really work like that. There's also just

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<v Speaker 2>the historical relationship of gold to various other assets during

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<v Speaker 2>periods of market stress. When COVID broke out, it rallied.

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<v Speaker 2>When Russia invaded Ukraine, it rallied. So the belief that

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<v Speaker 2>it is a safe even becomes a reality and traders

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<v Speaker 2>turn to it when markets run into trouble or due

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<v Speaker 2>political tensions run high. I should say that when you

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<v Speaker 2>get a severe sell off, gold does tend to get

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<v Speaker 2>caught up on that in the short term because there's

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<v Speaker 2>a dash for cash. Hedge funds have margin calls to meet.

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<v Speaker 2>Gold is liquid, it's easy to sell. But then after

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<v Speaker 2>those kind of periods of turbulence, then you start to

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<v Speaker 2>see it. Right, So that's what you saw this month,

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<v Speaker 2>and that's what you saw, for example, in the global

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<v Speaker 2>financial crisis.

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<v Speaker 1>Well, let's try to understand how this recent rally fits

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<v Speaker 1>into historical trends. What does it tell us about investor

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<v Speaker 1>sentiment at the moment.

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<v Speaker 2>So the current rally has been really strong, you have

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<v Speaker 2>to go fairly far back to find kind of parallels.

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<v Speaker 2>You could argue after the global financial crisis in the

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<v Speaker 2>years twenty nine twenty ten, gold had a similar performance,

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<v Speaker 2>and then further back than that, I mean, the best

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<v Speaker 2>time ever for gold was the nineteen seventies when you

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<v Speaker 2>had stagflation actually across a lot of the West. That decade,

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<v Speaker 2>Richard Nixon abandoned the gold standard and gold rose tenfold.

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<v Speaker 2>So at the moment, there's some factors obviously moving in

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<v Speaker 2>gold's favor. There's war in Europe, there's obviously dupolitical attentions

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<v Speaker 2>across the Middle East. You have some people who believe

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<v Speaker 2>that inflation is going to be structurally more elevated for

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<v Speaker 2>the next couple of years than it's been for the

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<v Speaker 2>last thirty years. And all of that, then combined with

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<v Speaker 2>this trade war, all that stands to benefit gold.

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<v Speaker 1>What do we know about who's buying gold?

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<v Speaker 2>The most important driver of the rally has been central banks.

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<v Speaker 2>Central banks hold gold in there foreign exchange reserve alongside dollars, euros,

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<v Speaker 2>yen other assets. But basically the situation is rich countries

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<v Speaker 2>that were part of the post war gold standard, so

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<v Speaker 2>that Bretonwood system have a lot of gold. The US

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<v Speaker 2>has nearly nine hundred billion dollars worth of gold. Germany

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<v Speaker 2>has nearly half that, Italy has a lot, Switzerland has

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<v Speaker 2>a lot, not so much the UK unfortunately, because a

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<v Speaker 2>lot of it was sold about thirty years ago by

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<v Speaker 2>Gordon Brown famously for about a tenth of the price

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<v Speaker 2>it is now. But that leaves other developing economy central

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<v Speaker 2>banks relatively underweight. So China, for example, has less gold

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<v Speaker 2>and its official reserves than Italy. So in the last

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<v Speaker 2>fifteen years central banks have been big buyers China, India,

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<v Speaker 2>Poland the Czech Republic. They've all been adding a lot

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<v Speaker 2>of gold. And that's actually sped up in particular since

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<v Speaker 2>the invasion of Ukraine by Russia, because Russia's foreign exchange

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<v Speaker 2>reserves held in euros held in dollars were free from them,

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<v Speaker 2>and that I think woke up a lot of central

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<v Speaker 2>banks around the world to the fact that their foreign

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<v Speaker 2>exchange reserves, which were predominantly held in dollars and also

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<v Speaker 2>in euros and pounds, were vulnerable to the long arm

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<v Speaker 2>of European sanctions or US sanctions. But again, it's just

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<v Speaker 2>you and your gold. If you are keeping your gold

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<v Speaker 2>in a safe within your own territory, it can't be seized.

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<v Speaker 2>It can't be taken. It's universally accepted, and so it's

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<v Speaker 2>a way to diversify your risk and to bring some

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<v Speaker 2>of your foreign exchange reserves out of the kind of

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<v Speaker 2>long arm of some of the western countries.

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<v Speaker 1>I'm just picturing this idea of people sitting in rooms

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<v Speaker 1>full of gold now. But are there practical issues with

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<v Speaker 1>holding gold? Given that? As he pointed out, one of

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<v Speaker 1>the musual things about it is it's a physical asset.

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<v Speaker 2>So there's a number of ways to hold it. I mean,

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<v Speaker 2>for most the most practical way is probably through a

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<v Speaker 2>gold back to ETF basically by a share in a

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<v Speaker 2>fund that holds a big pile of gold. It's easy

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<v Speaker 2>to buy, it's easy to sell. One drawback is that

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<v Speaker 2>there are with it because you're paying someone essentially for

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<v Speaker 2>storing the gold. Also, if you're some sort of doomsday

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<v Speaker 2>prepper type of buyer, which there are plenty of in

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<v Speaker 2>the gold market, you don't have direct custody over your gold,

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<v Speaker 2>So if that's important to you. I always think, though,

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<v Speaker 2>in a doomsday scenario, you're better off buying tinned food

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<v Speaker 2>and guns.

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<v Speaker 1>Because I don't know how doomsday you're preparing for.

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<v Speaker 2>I don't know how useful really gold would be if

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<v Speaker 2>everything goes wrong. You can also buy fifty thousand dollars

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<v Speaker 2>half kilo bar from Costco or any other bullion dealer.

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<v Speaker 2>Costco has become really popular. They charge gold shopping. Yeah,

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<v Speaker 2>you can go gold shopping, but Costco charge about a

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<v Speaker 2>two percent premium over the spot price. That's not bad,

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<v Speaker 2>but then there's practical issues like security and then crucially

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<v Speaker 2>reselling because obviously you'll go to a bullion dealer, but

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<v Speaker 2>they might only offer you a couple of percent below

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<v Speaker 2>the spot price. So again that's kind of a friction

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<v Speaker 2>to buying and selling.

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<v Speaker 1>We heard from Warren Buffet a little bit earlier talking

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<v Speaker 1>about his views on gold and the question of what

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<v Speaker 1>utility it really has and how it rates as a

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<v Speaker 1>store of value. Is there many people that share his

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<v Speaker 1>view on gold and the question of utility.

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<v Speaker 2>I mean, I think he's right. Basically, it's not that useful.

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<v Speaker 2>A small amount is used in technology. It has ornamental values,

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<v Speaker 2>it's quite beautiful, has its distinctive color, it doesn't tarnish.

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<v Speaker 2>It's very valuable, so it's good for jewelry it does,

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<v Speaker 2>but its value, you know, three five hundred dollars an

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<v Speaker 2>ounce is far in excess of its actual utility. What

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<v Speaker 2>it does have going for it is scarcity. It's quite

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<v Speaker 2>rare in the Earth's crust. It's quite difficult to get out.

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<v Speaker 2>It has obviously historical importance, the cultural salience millennia of history,

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<v Speaker 2>as a store of value, as something that has been

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<v Speaker 2>perceived to be valuable, and so I guess you could

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<v Speaker 2>say in some senses the use case is a bit

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<v Speaker 2>like bitcoin, where you don't have a counterparty. As I

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<v Speaker 2>mentioned earlier, Bitcoin obviously also requires some effort to mind.

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<v Speaker 2>But the difference is that, I mean, gold has a

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<v Speaker 2>track record of rising during periods of market stress, it's

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<v Speaker 2>not massively volatile, and it has strong cultural importance in

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<v Speaker 2>parts of the world economy that are growing very quickly,

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<v Speaker 2>so China and India and Pakistan.

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<v Speaker 1>What about the risk of a gold bubble? What could

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<v Speaker 1>disrupt this rally that we've seen that's pushed gold to

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<v Speaker 1>record high after record high.

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<v Speaker 2>The fact that it's nearly been a unbroken line upwards

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<v Speaker 2>since early twenty twenty four, some people in the market

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<v Speaker 2>think that a pause or a period of consolidation might

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<v Speaker 2>be likely. Some of the things that could be bearish

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<v Speaker 2>for the price if you had major easing of the

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<v Speaker 2>trade war, for example, any de escalation in major conflicts,

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<v Speaker 2>so in particular the war in Ukraine. That could lead

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<v Speaker 2>to a selloff if people perceived geopolitical tensions to be

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<v Speaker 2>easing somewhat. But I think the thing that would do

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<v Speaker 2>lasting damage, but it's really a tail risk, is if

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<v Speaker 2>you had some of the large developed economy central banks,

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<v Speaker 2>so the US, which has a lot of gold obviously,

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<v Speaker 2>or Germany or Italy, if for whatever reason one of

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<v Speaker 2>those countries decided to start selling their gold into the rally,

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<v Speaker 2>for example, if they had a debt crisis or some

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<v Speaker 2>other reason to do so, that would be extremely burish

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<v Speaker 2>for the price. And any news or hints towards that

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<v Speaker 2>I think would be very damaging to the price. And

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<v Speaker 2>that was actually what drove gold's bear market through the

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<v Speaker 2>nineteen nineties right up to two thousand. Everyone was selling

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<v Speaker 2>their gold and the consensus was that gold is a

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<v Speaker 2>relic and the smart thing to do is sell it

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<v Speaker 2>and take dollars what you can. And that was the

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<v Speaker 2>environment in which the UK sold its gold for such

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<v Speaker 2>a low price. Central banks have been buying for the

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<v Speaker 2>last fifteen years, that's been the key driver of price.

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<v Speaker 2>I think the only thing that will really halt and

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<v Speaker 2>reverse gold would be if that trend stops.

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<v Speaker 1>Okay, Jack Ryan, our Precious metals reporter, thank you very much.

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<v Speaker 1>For more explanations like this from our team of three

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<v Speaker 1>thousand journalists and analysts around the world, go to Bloomberg

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<v Speaker 1>dot com slash explainers. I'm Stephen Carroll. This is here's why.

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<v Speaker 1>I'll be back next week with more. Thanks for listening.