Gold opened in London January 31 at an all-time record of $2.845 an ounce. Gold is an insurance policy against monetary and political disaster. More precisely, it has become a unique insurance policy against systemic risk, breaking away from other assets it used to track – foreign currencies and other metals, for example, as well as inflation-linked Treasuries.
That should worry policymakers in Washington.
“I will end the war in Ukraine, I will stop the chaos in the Middle East and I will prevent World War III from happening, and you have no idea how close we are,” Trump declared during his election campaign. Trump vowed to end the Ukraine War within a day of taking office, but an end to the war is nowhere in sight. The West won’t accept Russia’s core demand for Ukrainian neutrality. Meanwhile, Russia continues to grind out steady gains.
What will the US do if Russia achieves a decisive military victory over Ukraine? No one knows, and the price of end-of-the-world insurance continues to rise.
Gold’s record run is unique in three ways.
First, gold stopped trading with other metals, including silver, copper and other industrial metals. That relationship prevailed from 2007 through the end of 2023. For the past year, gold has soared while other metals are little changed.
Second – as we have noted often – gold traded in tandem with the yield of inflation-protected US Treasuries, or TIPS. Both are forms of insurance against unexpected inflation and severe dollar depreciation. But gold de-coupled from TIPS yields in March 2022 after the US and its allies seized $300 billion of Russian foreign exchange reserves. An insurance policy that the insurer can seize at will is less attractive than gold in the vaults of a central bank.
Third: Other currencies used to represent a hedge against the dollar. The gold price roughly tracked the Japanese yen, an alternative to the dollar. But this relationship also broke down in 2022. For one thing, Japan’s government debt is now 250% of GDP (twice the US figure of 120%), and the central bank owns more than half of that debt. Japan’s inflation has crept up, eroding consumer purchasing power and weakening the country’s political institutions. The yen is no longer a safe haven for dollar investors. Neither is the Euro, which carries the baggage of weak and deficit-ridden economies such as France and Italy.
With an annual trade deficit of $1.2 trillion and a net international investment position of negative $25 trillion, the United States has to sell more than a trillion dollars of assets to the rest of the world each year. Foreign investors stopped buying US debt five years ago, and the US has been covering its trade deficit by selling tech stocks to foreigners. A shakeout in the stock market would have repercussions for the US dollar.
Treasury Secretary Scott Bessent observed during his confirmation hearings that the US federal deficit of between 6% and 7% is unprecedented for a period without war or recession. As I wrote December 20 in Asia Times, the deficit might be Trump’s nemesis. Foreign central banks are reducing their holdings of US Treasuries, leaving American banks to finance most of the US government’s deficit since 2020. But financing the still enormous deficit will require either lower interest rates to support bank purchases of Treasuries –which is inflationary – or higher yields on government debt to attract interest-sensitive private investors.
Both the strategic balance and the global financial picture are getting riskier. Gold has become a unique hedge against both kinds of risk, and its price run is a troubling gauge of risk perceptions.
