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When the Dutch navy sailed up the Thames estuary and launched a surprise attack on the British fleet in 1667, First Lord of the Admiralty and diarist Samuel Pepys panicked, saying, “The whole kingdom is fallen.” He sent his wife and father from London to bury the gold coins he had kept as part of his fortune in the garden.
Today's Chinese and Indian jewelry and bullion buyers aren't the first to trust gold as a means of financial protection. Gold doesn't pay dividends and is very heavy, but in times of war, crisis, inflation and turmoil, gold can provide security. “When bad things happen, gold really comes into its own,” says John Reid, market strategist at the World Gold Council.
So the resurgence of gold, a metal considered by many investors to be an anachronism, is a worrying reflection of the times: Gold prices hit a record high of $2,531 per troy ounce on Tuesday, five times the inflation-adjusted price when Britain sold part of its gold reserves 25 years ago. (Switzerland was also a big seller at the time.)
Central banks have started buying gold again, especially those in China, Russia and other countries that want to reduce their reliance on the US dollar. Chinese retail investors, spooked by the real estate crisis and economic uncertainty, have rushed to buy gold. The world's wealthy are also buying more gold, and US hedge funds are following the market trend.
There were signs of another gold rush this week, with buyers scrambling to get in on the action, but the excitement hasn't yet reached gold miners. Unlike California in 1848 or South Africa in the 1880s, exploration and mining companies are struggling to secure investment. Trading gold and its derivatives is easier than mining and refining the metal.
“We're still down,” Nick Brodie, CEO of Golconda Gold, a small, publicly traded Canadian mining company, told me. In May, Golconda began producing concentrate (powdered gold ore) after acquiring part of a dormant South African mine in 2015. The mine was originally called Agnes, after the wife of a British prospector who discovered gold there in 1888.
The problem for a junior company like Golconda is that production costs are rising and, as Brody says, “everything I make goes back into the mine.” The concentrate needs to be shipped to China for refinement, and while higher prices will eventually boost profits, it's three years away from reaching full production. Gold mining is not a get-rich-quick scheme.
Gold is already plentiful: The Federal Reserve Bank of New York has 507,000 bars in its vaults, worth about $510 billion at this week's prices (their weight is supported by bedrock on Manhattan Island, 15 meters below sea level), and London vaults, including the Bank of England's, hold another 8,650 tons of bars, worth $690 billion. Tons of gold are being mined and reburied.
The gold stored at the New York Fed is not the property of the Fed. Much of it was brought to the New York Fed in the same way that Pepys's fortune was brought to the Gardens. During and after World War II, many governments and investors moved their gold overseas to places considered safe havens. The gold is kept in tight security and not many have felt the need to move it again.
Gold hoards are becoming increasingly precious, signaling deep investor fears. In times of crisis, such as Russia's invasion of Ukraine in 2022, gold prices tend to soar as investors flee risky assets. The effects remained even after G7 countries froze Russia's foreign exchange reserves in response to the invasion, because gold stored in Russia would not have been as risky.
Central bank purchases of gold have increased over the past two years as countries such as Russia, China, India and Kazakhstan attempt to “de-dollarize.” Central banks have said they are increasing their gold purchases because they are concerned about the long-term risk of rising inflation. This is not reassuring news, given that it is central banks' job to keep inflation in check.
Gold enthusiasts are warning scathingly of currency devaluation and financial collapse. Author and investor Robert Kiyosaki wrote about the “everything bubble” in April. “Protect yourself: buy more real gold, silver and bitcoin.” For the worrisome, there’s plenty to worry about this year. Bitcoin, too, is rising, buoyed by renewed confidence in cryptocurrencies and doubts about the dollar.
But memories are short. Gold became popular after the 2008-09 financial crisis. In 2011, gold prices topped $1,900 an ounce (higher than they are now in real terms) on concerns that easy monetary policy would stoke inflation, but then fell again. This week's excitement may similarly be short-lived. Inflation will continue to fall and geopolitical stresses may ease.
Yet when the world goes terribly wrong, gold becomes valuable. “At night, my wife and I… walk again, and talk of gold, which we have not quieted in our hearts for safety,” Pepys wrote a few days after the Dutch raid. Fortunately, England held out, and Pepys recovered most of his gold.
