On Friday (April 12), intraday prices for gold hit an all-time high of $2,445 per ounce before closing the day at $2,360. For a normally sleepy asset, gold’s ten percent rise in three weeks is remarkable. Gold is up 14 percent year-to-date, but most of the price action has occurred in the past week. The question is, why?

This outstanding performance seems particularly surprising given that gold ETFs (exchange-traded funds) have seen ten consecutive months, and three years overall, of outflows, including $6.5 billion withdrawn in the first quarter of 2024 alone. This recent exodus occurred at the same time that Bitcoin ETFs, approved only in late January 2024, have experienced record breaking inflows now totaling $12.5 billion in under three months. Since ETFs are mainly held by (or on behalf of) individual investors, can we therefore conclude that it is not retail driving the price of gold to all-time highs? Perhaps, but since Costco started offering gold bars last October, research analysts estimate that Costco is selling up to 100,000 ounces a month ($200 million), equating to well over a billion dollars in sales since launching the initiative. Perhaps these buyers no longer trust Wall Street to hold their gold for them, and prefer to safeguard it themselves.

Nor is worldwide demand for gold growing. The World Gold Council notes that total global demand for gold—excluding opaque OTC markets—fell by five percent in 2023, while OTC may have offset that decline. Global supply chugs along at a reliable one to two percent per year, constrained by the costs of mining. So what is driving the price ever higher?

The world’s central banks, except for those in the U.S. and Europe, have been on a gold buying spree. China’s central bank just announced its seventeenth straight month of accumulating gold reserves. Russia and India, alongside numerous other countries in Asia, central Europe and elsewhere, have also been buying gold bullion at what the World Gold Council calls a “blistering” pace. China, Russia, along with the BRIC alliance and their allies, are progressing an alternative to the U.S. dollar that would be backed by gold and other commodities. These countries want to “sanction-proof” their financial systems and economies from the weaponization of the U.S. dollar monetary regime, and also fear that their holdings of U.S. treasuries are at risk of devaluation as the U.S. government’s credit position continues to deteriorate through deficits and rapidly rising debt.

Central bank buying would explain a moderately sloped incline over the long run in the price of gold, not (by gold’s slow and steady standards) the dramatic rise witnessed in recent days. Something has changed of late in the market’s sentiment, and it is driving prices of the world’s best known “risk off” asset to new heights.

I’d suggest three possible explanations, whether working separately or more likely in concert: inflation, war, and the monetary and social debasement that comes from both.

Last week, March’s CPI results, which came in at 3.5 percent headline and 3.8 percent core (excluding the more volatile food and energy sectors), confirmed what many had feared. The prospects for lower interest rates (and lower prices) in 2024 have faded from view. Inflation now appears to be a permanent fixture of the U.S. economy. For as long as there has been paper currencies, gold and silver have been valued as a “hard money” alternative to price inflation, and that view is likely influencing gold prices.

The second factor likely pushing gold prices higher is the harrowing prospect of widening war. At the same time that the conflict between Russia and Ukraine is threatening to expand to include NATO members and to deepen U.S. involvement, what was a narrow conflict between the state of Israel and the Hamas terrorist network is spiraling out of control and threatening to engulf the entire Middle East. After months of saber-rattling, warning signs grew last week that Iran was preparing to imminently launch an attack on Israel. These concerns were confirmed over the weekend when Iran launched an aerial assault, firing hundreds of rockets and drones, against the embattled Jewish state. While to date Israel’s response has been measured, a widening conflict with Iran—the sworn enemy of Israel—is unlikely to be contained and may quickly spiral out of control. The Biden administration seems powerless to prevent this. In times of war, gold becomes highly valued as a hedge against risk and value destruction.

With escalating war and rampant price inflation looming, the prospects for further debasement of the value of the U.S. dollar, whether in purchasing power terms or relative to other currencies, are now higher than ever. The rise of the price of gold in U.S. dollar terms doesn’t necessarily mean that gold is more expensive, it simply means that the dollar is worth less. When the Federal Reserve was founded in 1913, one ounce of gold could be bought for less than $19. Since then, the value of the dollar has fallen by 99 percent, and the price of gold has multiplied 124-fold.

None of these conditions appear likely to abate any time soon. Price inflation, war, and debasement of the fiat currencies of the West will continue to drive gold prices higher.

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