Gold’s mystery rally is a forewarning of fiscal ruin and global dystopia

KCGM gold mine
Experts can account for only half of the 2845 tonnes of supply from mines - John W Banagan/Getty Images Contributor

The gold reserves of Italy and France have each risen in value by roughly $85bn (£65) over the last two years. Lucky them.

The Italians never accepted the “end of history” ideology, the beguiling notion at the end of the Cold War that there were no longer serious enemies and that bullion had become superfluous, a barbarous relic in a globalist age of financial sophistication.

This realism is rooted in hard experience. Italy entered the Second World War with depleted gold reserves, and quickly came to regret it. The country’s post-war gold was used as collateral for an emergency loan from the Bundesbank in the 1970s, and was later used to shoehorn the soft lira into union with the hard D-Mark.

The Bank of France did sell 589 tonnes during the false calm of the early 2000s for a pittance, but kept the lion’s share.

If Britain had run its foreign reserve policy with greater skill, it could now be sitting on a sudden gain worth several times the £22bn black hole alleged by Rachel Reeves.

This bullion would have anchored the gilts market, or could have been used (indirectly) as a one-off to fix some of our crumbling infrastructure, and whittle down the post-Covid backlog at the NHS – without having to tap bond markets.

Gordon Brown is an underestimated statesman of many qualities, but his trading instinct is not one of them. His sin of commission was to order the Bank of England to sell over half its gold reserves at the absolute bottom of the market – for a 10th of its current value – in order to buy fiat paper euros.

His larger sin of omission was not to buy gold by the cart-load when others were giving it away, which would also have stopped sterling becoming so overvalued and hollowing out British industry in the early to mid-2000s. As it was, Britain went into the Lehman crisis with almost no reserves of any kind. It still has a wafer-thin safety buffer, courting fate in our dystopian new world.

Today’s gold market is itself a herald of this menacing disorder. The correlations of the last half century have gone haywire. Gold has been rising in lockstep with its arch-nemesis – the US dollar – reaching an all-time high of $2,790 a week ago. It refuses to retreat when bond yields spike.

“There is something very mysterious about this market move,” said Ross Norman, a bullion veteran and founder of Metals Daily. “Gold is rising onwards and upwards with scarcely a pause for breath. Speculators would normally take profits on the way.”

He added: “You could ask a 10-year US treasury note what the gold price should be and it would tell you about half the current price. The action is heedless of traditional drivers, it has massive conviction, and it is largely opaque.”

Experts can account for only half of the 2845 tonnes of supply from mines and scrap since the rally took off seven months ago. Central banks did triple purchases in 2022 and 2023 but have since stepped back, reporting just 136 tonnes of net purchases since March. They buy in an orderly fashion and do not chase the price. The Chinese central bank has bought no gold for five months (officially).

India has imported 420 tonnes, mostly for jewellery. Chinese domestic demand has absorbed 730 tonnes. There are bits and bobs from ETF funds and German libertarians, and “spec longs” on the Chicago Mercantile. The sums do not add up.

“It is very hard to buy very significant amounts of gold without leaving any footprint, so this rally is confounding everybody,” he said.

Whoever is buying, the bull run has geopolitics and fiscal revulsion written all over it. The G7 decision to freeze $300bn of Russian reserves in 2022 stunned the Global South. So did Russia’s expulsion from the Swift payments system, accompanied by the threat of secondary sanctions against any bank or company, anywhere.

It told every authoritarian across the planet to diversify out of US treasuries, gilts, bonds, and into physical gold, held in vaults beyond the long arm of the West.

No country likes being at the mercy of the US financial cycle in any case. “Every night I ask myself: who decided that the world currency should be the dollar after the end of the gold standard?” said Luiz Inácio Lula da Silva, president of Brazil, last year.

Yet Putin failed to secure backing for his Brics currency at his summit in Kazan two weeks ago. Russia has been pushing for a new reserve note – the “unit” – backed by 40pc gold and 60pc from a currency basket, a sort of Bretton Woods II. All he got was vague talk of using local currencies more widely.

There is a school of thought that we are starting to see defensive action by the holders of wealth against runaway public debts in America, Europe and Japan, pushed closer to the point of no return by the fiscal trauma of Covid.

The path of least political resistance for chronic debtors is to erode the burden via inflation, and when investors refuse to take it any more, by means of financial repression.

The International Monetary Fund says global public debt will hit $100 trillion in 2024. The US is running a budget deficit of 7.6pc of GDP this year and will continue running deficits above 6pc through this decade, pushing the debt ratio 132pc in 2029 even if Washington behaves, which it will not.

The Committee for a Responsible Federal Budget says Donald Trump’s unfunded tax cuts would add another $8 trillion to the US debt over a decade, and Kamala Harris’s unfunded spending would add $4 trillion. The fiscal profiles of China and Brazil are not much better.

Yet the puzzle remains. Half the gold-buying since March is off books, via proxies, contriving to avoid detection, which raises an unpleasant possibility: is this really about China accumulating a war chest for a showdown with the West, presumably at a well-chosen moment as Russian forces close in on an exhausted Ukraine?

The fear in strategic circles is that Xi Jinping will impose a “customs blockade” on Taiwan, controlling the supply of semiconductors and asserting sovereignty short of an outright invasion. Any hesitation by Washington (probable) would lead to the collapse of US credibility across East Asia.

For the last three years, Russia, China, Iran and North Korea have been operating in collusion and on a war footing, each fostering belligerent hyper-nationalism as a means of regime survival, and all aiming to press their advantage before the West gets a grip.

The democracies, lost in their culture wars, have not responded by putting their societies on an equal war footing to deter this opportunistic escalation. If we are indeed drifting towards a fundamental and violent convulsion of the post-war global order, wouldn’t you expect gold to go parabolic?