Quibble with Bloomberg - Gold isn't a counterparty free asset - it requires physical storage. Nations and funds may be buying and selling gold on the market but the asset may not actually move, it's just a paper trade on gold sitting in a US vault.
This is exactly why there have been headlines about Germany 'repatriating' $180B worth of gold that is physically in the US. Seizing or threatening to seize that gold for negotiation leverage is exactly Trump's MO, which foreign parties will increasingly feel is unacceptable exposure.
In a heist, gold can be transported in quantity, or transported securely or transported quickly, but not all 3.
Seal Team 6 with C-5s aren't good enough. Unless they steal the TARDIS from UNIT first. That's the plot of the next summer's blockbuster: Doctor Goldfinger.
Why would it need to be made less conspicuous? A C-5 is pretty obvious, and Loading a C-5 is fairly straightforward, especially with things that come in bricks and are stacked - have you ever seen a gold storage facility?
I have indeed seen a state gold storage facility. I served on a board that decommissioned one as it became a museum.
As for a gold-cast Abrams, I thought the merit was in the absurdity of trying to be inconspicuous with a C-5. Doctor Goldfinger won't just be an action blockbuster, but a spoof.
This made me wonder if the real successor to today’s system isn’t gold or Bitcoin, but a more explicit, institution-backed version of a digital dollar (something this administration seems to be circling, albeit sloppily). Not crypto as a flight-to-safety asset, but blockchain as a settlement infrastructure.
However, that only works if it’s set up and backed by real institutions, companies, etc. In the end, it still reinforces your point: trust, not technology, is doing most of the work, and that's what's happening with gold anyway.
It's an interesting thought, but I'm not sure what the difference is between a digital dollar and the dollars we use now. Almost all dollar transactions are digital, and almost all dollars are stored in a ledger on a computer rather than as paper currency moving around. It seems to me like the dollar already IS digital.
Fair point. I should have been more clear. Most dollars are digital already in the sense that they’re entries in bank ledgers. What I’m getting at isn’t “digital payments,” but who issues and guarantees the ledger.
Today, dollars are digital through private intermediaries (banks, clearinghouses, card networks). A true “digital dollar” would be closer to a public, state-backed settlement layer…more like cash, but programmable and instant like bitcoin but less volatile, and without relying on bank balance sheets or correspondent banking.
Use a log normal chart - gold nearly doubled before the inflation really kicked in.
Part of the rise (and part of central bank demand) was due to the sanctions imposed in Russia. Seizing dollars held at the Fed and euros held in Euroclear and banning access to SWIFT tends to get rogue countries focused on gold as opposed to currency.
Nobody has any really good explanations for the last 50 percent move in Gold. Short-covering (some people sold into the rally betting we’d see a correction after Diwali- whoops) is part of it, your point about Asian demand, and also momentum traders.
Gold can’t really be the replacement for the dollar, though- there isn’t enough of it around, even if it appreciates another 10x.
The Euro also can’t replace the dollar. It has neither a bond market nor a government nor a real central bank, and it has a trade surplus- meaning people owe euros rather than accumulating them. Moreover the ECB wants the currency to be weak to support manufacturing.
RMB can’t replace the dollar. China has capital controls, no rule of law and a trade surplus. You also pointed out that China prefers a weak currency.
As for the Dollar- it is basically back to pre-Covid levels against the Euro, which makes sense. There was a flight to quality during the COVID scare as the US had the financial firepower to stimulate. Good for the dollar. Now the rest of the world is recovering and things are normalizing. The current levels for the Dollar Index are unexceptional.
Gold is interesting. The Swiss Franc is interesting and the Yen is interesting. I’m not sure it is really a Dollar story though. Not yet, at least.
I think it's not correct and unfair to say "nor a real central bank" re ECB, but definately as it does not have a truly unified bond market and its bond market(s) are nowhere deep enough, it can't unseat dollar. Dollar history does say it's not a sine qua non to be deficit to have dollar as ref currency, but combining up factors of course, rather than individual quibbles.
The ECB’s ability to buy/fund government debt is limited by law, and there is no “Euro” government or “Euro” government bond market (of any size).. There are BTP, OATs, Bunds, etc.
Even in EM countries it is said that a country can’t default on its own domestic currency government debt because its central bank can simply buy it, printing money (not that inflation is always better than default). The ECB can’t do this- it is not a real central bank. The Euro only works when Germans are willing to pay Italy’s debts. Greece wasn’t much larger than Silicon Valley bank, and created a years long existential crisis.
"Gold can’t really be the replacement for the dollar, though- there isn’t enough of it around, even if it appreciates another 10x."
You don't necessarily need to trade in gold itself, a return to a gold standard or even gold in a tokenised form would suffice for it becoming a reserve asset.
It is already an important reserve asset- maybe 25 percent of total central bank reserves at today’s prices.
And at today’s prices maybe all the gold outstanding might be worth $50 trillion.
Of course, all of the US dollar denominated debt outstanding - government , corporate l, consumer, Eurobonds, bank loans is multiples of that number. And of the whole world went on gold you’d have to include all of their domestic and home currency debts.
In a gold standard, debt can’t sustainably grow faster than the supply of gold and countries can’t run trade deficits unless they have gold to sell. There would be a painful deprsssion- not popular with voters or polticians.
Meanwhile, bond investors have short memories. Time and again countries running irresponsible policies default (Russia, Argentina) and a few years later investors are rushing back in. A few nods to fiscal sanity by a delinquent issuer and all is forgiven. (Until next time)
Given the willingness of bond investors to take risk, given the few surplus regions are mercantilist and don’t want to shut down their export industries, and given voters doesn’t like depressions, hard to see us going back to a global gold standard.
I believe that the BRICs have discussed de-dollarization and something called The Unit, backed by gold, to replace the dollar in transactions between them.
Anyway, what would happen? We would probably reduce the money supply, raising the dollar's value, which would hurt trade. Interest rates would likely rise. The difference between the US and Britain was that Britian had a great dependence on trade. US trade is 13% of GDP, so I’m not sure how much less trade would impact GDP.
Certain companies would be harmed. Trump going around and making people hate the US is about the dumbest thing I have ever heard of. The Art of the Deal may really come back and bite us in the ass.
I'm one of those toxic Bitcoin maxis that everyone hates. Guys like me are going through a painful cognitive dissonance thing right now. We feel so strongly that Bitcoin is superior to gold in pretty much every way (can't counterfeit, predictable supply, highly divisible, easily transportable, zero carry costs, etc.) yet the market has spoken, and it's chosen gold as the "safe haven" asset.
Don't get me wrong. I'm glad I discovered Bitcoin eleven years ago. It's been a great hedge against fiat debasement. But all the time I spent in the Bitcoin echo chamber convinced me, with 100% percent certainty, that when the shit hit the fan, and things went sideways, and the dollar's supremacy was inevitably questioned, it would be Bitcoin, not gold, that would absorb all the safe haven money. Clearly I was wrong. I'm not smart enough to understand exactly *why* I was wrong, but here we are.
My only consolation is that I never talked anyone else into investing in BTC so at least my enthusiastic, but misguided views weren't a burden to anyone but myself.
I think it's that gold has been valuable for thousands of years, while Bitcoin is barely a decade old. You could imagine Bitcoin being seen in 100 years as a fad; not possible with gold.
Also, with Bitcoin, you have to believe in cryptocurrency AND you have to believe that BTC will continue to dominate the category despite having serious deficiencies compared to others.
My stepmother--who made herself a good pile of $$$, mainly in equities, before age made her stop--was an early-ish adopter of Crypto. Mainly Bitcoin; starting just before Trump1.
A savvy, non-institutional investor, she never saw it as anything more than a novel side hedge to equities investment, as she also had started buying tech stocks well before Bitcoin caught her eye.
Which is to say, maybe Crypto is currently just that to the global markets: a novel side-bet.
If you would've said that to me a few months ago, I'd say it were blasphemy. But you're right. That's exactly how it played out. Investors collectively and decisively placed Bitcoin in the speculative, high-beta tech stock bucket, not the "safe haven" bucket.
You were smart to get into BC early, and you'd probably be just as smart to hold onto your BC 20 years into the future. All investments tend to be cyclical and very unpredictable in the near future.
“A lot of people asked me whether gold’s rise as a share of reserves was due to people putting their money into gold, or to gold going up in price.”
I think this is a question about elasticity of the supply of gold to the market. An inelastic supply implies the latter: a small increase in demand results in a large increase in price but the actual quantity of gold being held doesn’t change much. If the supply is more elastic, then not only is the price increasing, the amount of gold being held has also increased and a large price increase is due to a large increase in demand.
The Russian sanctions (which I should say I am was and am not per se against as such [ETA: mealy mouthed, say cautiously for but same time worried about perverse side effects]) are to me something of a possible illustration of a problem for a class of threat which are most effective as deterents, but once one actually starts to use them rapidly induce "ecosystem" evolution away from the risk once the risk is made applied.
So are best left implied and unused as they will once one starts to use them, actually lose their power.
Certainly now there are many reasons for actors to want to reduce dollar payment exposure although the systematic effeciency of dollar still is a counterweight to that.
This was interesting but its assumption of a dollar dominated world economy being a stable one is very much a USA-based world view isn't it? How many other countries would beg to differ I wonder? Emerging markets, for instance, have often paid a high price. And, over the decades, many developed ones too. It's an aspect of the dollar's reserve currency "exorbitant privilege" that tends not to be acknowledged, or perhaps even noticed, by Americans
I wonder if there is an argument about decline of manufacturing employment in US and Germany that parallels the decline of farm employment.
The estimated percentage of the labor force engaged in agriculture fell from 41 percent in 1900 to 21.5 percent in 1930, to 4 percent in 1970, and to a mere 1.9 percent in 2000. Interestingly, peak manufacturing, 39% in WWII, is close to the agricultural number in 1900. Needless to say that shift from a dominant agricultural sector to a dominant manufacturing sector to today's economy was hugely disruptive. But people found new jobs and life went on.
The question in part is what jobs will be associated with a future economy and what will the mismatch be between the number and type of jobs theoretically available and the available labor force. I think this will keep economists (& Noah) guessing because there are billions of working people independently trying to find or create gainful employment.
Manufacturing employment isn’t coming back in any developed economy. The price of labor is too high for it to make sense.
If manufacturing grows, it will look like Tesla factories full of robots doing as much of the labor as possible. This is actually a good thing in the long run, as real economic growth is caused increased productivity per unit of human labor.
Interestingly, manufacturing has grown since the 1970s (and presumably before, but that’s where FRED’s data set starts), while employment has shrunk dramatically (especially since 2000). It really is only the impact of China since roughly 2010 that has stopped manufacturing growth in the USA:
When gold started going up, I was interested in how much the supply could shift to meet the new demand. I was shocked to learn that gold is mined at a rate of about 10 tons or well over $1 billion *per day*. I'm surprised gold prices can move that much, with that kind of ongoing supply. But the total stock of gold is over 200,000 tons, so maybe I shouldn't be that surprised.
Interesting article. What industrial policies might work for the US in today’s conditions? What can we learn from other countries that are good at manufacturing?
The gold-as-fallback framing is right, but it misses one dimension. Central banks aren't just buying gold to hedge against dollar instability — they're also stockpiling physical commodities. The US just committed $12 billion to Project Vault for a civilian critical minerals reserve. China has been building strategic mineral stockpiles for over a decade. When major economies simultaneously build physical commodity reserves, the reserve currency question becomes secondary to the reserve resource question.
The deeper issue: if gold rises because institutions lose confidence in national currencies, and mineral stockpiles rise because nations lose confidence in supply chains, what does a world look like where physical assets replace financial assets as the foundation of state power? That's the financial anarchy worth watching.
Quibble with Bloomberg - Gold isn't a counterparty free asset - it requires physical storage. Nations and funds may be buying and selling gold on the market but the asset may not actually move, it's just a paper trade on gold sitting in a US vault.
This is exactly why there have been headlines about Germany 'repatriating' $180B worth of gold that is physically in the US. Seizing or threatening to seize that gold for negotiation leverage is exactly Trump's MO, which foreign parties will increasingly feel is unacceptable exposure.
True, though if seal team 6 has some C-5a and wants your gold, it isn’t safe anywhere.
In a heist, gold can be transported in quantity, or transported securely or transported quickly, but not all 3.
Seal Team 6 with C-5s aren't good enough. Unless they steal the TARDIS from UNIT first. That's the plot of the next summer's blockbuster: Doctor Goldfinger.
😂. Good one!
At these prices, the weight of $7 billion in gold is that of about 1 Abrams tank.
Eureka! Maybe the loading of a C-5 could be made less conspicuous if the gold was first cast into the shape of an Abrams, and painted.
Why would it need to be made less conspicuous? A C-5 is pretty obvious, and Loading a C-5 is fairly straightforward, especially with things that come in bricks and are stacked - have you ever seen a gold storage facility?
I have indeed seen a state gold storage facility. I served on a board that decommissioned one as it became a museum.
As for a gold-cast Abrams, I thought the merit was in the absurdity of trying to be inconspicuous with a C-5. Doctor Goldfinger won't just be an action blockbuster, but a spoof.
This made me wonder if the real successor to today’s system isn’t gold or Bitcoin, but a more explicit, institution-backed version of a digital dollar (something this administration seems to be circling, albeit sloppily). Not crypto as a flight-to-safety asset, but blockchain as a settlement infrastructure.
However, that only works if it’s set up and backed by real institutions, companies, etc. In the end, it still reinforces your point: trust, not technology, is doing most of the work, and that's what's happening with gold anyway.
It's an interesting thought, but I'm not sure what the difference is between a digital dollar and the dollars we use now. Almost all dollar transactions are digital, and almost all dollars are stored in a ledger on a computer rather than as paper currency moving around. It seems to me like the dollar already IS digital.
Fair point. I should have been more clear. Most dollars are digital already in the sense that they’re entries in bank ledgers. What I’m getting at isn’t “digital payments,” but who issues and guarantees the ledger.
Today, dollars are digital through private intermediaries (banks, clearinghouses, card networks). A true “digital dollar” would be closer to a public, state-backed settlement layer…more like cash, but programmable and instant like bitcoin but less volatile, and without relying on bank balance sheets or correspondent banking.
That’s exactly what the ECB is doing with the digital euro, set for release in 2029.
Good overview, thanks.
Couple of points:
Use a log normal chart - gold nearly doubled before the inflation really kicked in.
Part of the rise (and part of central bank demand) was due to the sanctions imposed in Russia. Seizing dollars held at the Fed and euros held in Euroclear and banning access to SWIFT tends to get rogue countries focused on gold as opposed to currency.
Nobody has any really good explanations for the last 50 percent move in Gold. Short-covering (some people sold into the rally betting we’d see a correction after Diwali- whoops) is part of it, your point about Asian demand, and also momentum traders.
Gold can’t really be the replacement for the dollar, though- there isn’t enough of it around, even if it appreciates another 10x.
The Euro also can’t replace the dollar. It has neither a bond market nor a government nor a real central bank, and it has a trade surplus- meaning people owe euros rather than accumulating them. Moreover the ECB wants the currency to be weak to support manufacturing.
RMB can’t replace the dollar. China has capital controls, no rule of law and a trade surplus. You also pointed out that China prefers a weak currency.
As for the Dollar- it is basically back to pre-Covid levels against the Euro, which makes sense. There was a flight to quality during the COVID scare as the US had the financial firepower to stimulate. Good for the dollar. Now the rest of the world is recovering and things are normalizing. The current levels for the Dollar Index are unexceptional.
Gold is interesting. The Swiss Franc is interesting and the Yen is interesting. I’m not sure it is really a Dollar story though. Not yet, at least.
Had similar thought on the gold chart.
I think it's not correct and unfair to say "nor a real central bank" re ECB, but definately as it does not have a truly unified bond market and its bond market(s) are nowhere deep enough, it can't unseat dollar. Dollar history does say it's not a sine qua non to be deficit to have dollar as ref currency, but combining up factors of course, rather than individual quibbles.
The ECB’s ability to buy/fund government debt is limited by law, and there is no “Euro” government or “Euro” government bond market (of any size).. There are BTP, OATs, Bunds, etc.
Even in EM countries it is said that a country can’t default on its own domestic currency government debt because its central bank can simply buy it, printing money (not that inflation is always better than default). The ECB can’t do this- it is not a real central bank. The Euro only works when Germans are willing to pay Italy’s debts. Greece wasn’t much larger than Silicon Valley bank, and created a years long existential crisis.
"Gold can’t really be the replacement for the dollar, though- there isn’t enough of it around, even if it appreciates another 10x."
You don't necessarily need to trade in gold itself, a return to a gold standard or even gold in a tokenised form would suffice for it becoming a reserve asset.
It is already an important reserve asset- maybe 25 percent of total central bank reserves at today’s prices.
And at today’s prices maybe all the gold outstanding might be worth $50 trillion.
Of course, all of the US dollar denominated debt outstanding - government , corporate l, consumer, Eurobonds, bank loans is multiples of that number. And of the whole world went on gold you’d have to include all of their domestic and home currency debts.
In a gold standard, debt can’t sustainably grow faster than the supply of gold and countries can’t run trade deficits unless they have gold to sell. There would be a painful deprsssion- not popular with voters or polticians.
Meanwhile, bond investors have short memories. Time and again countries running irresponsible policies default (Russia, Argentina) and a few years later investors are rushing back in. A few nods to fiscal sanity by a delinquent issuer and all is forgiven. (Until next time)
Given the willingness of bond investors to take risk, given the few surplus regions are mercantilist and don’t want to shut down their export industries, and given voters doesn’t like depressions, hard to see us going back to a global gold standard.
Once again, Noah takes something that I personally would *never* have thought could be interesting…but makes it so.
I believe that the BRICs have discussed de-dollarization and something called The Unit, backed by gold, to replace the dollar in transactions between them.
Anyway, what would happen? We would probably reduce the money supply, raising the dollar's value, which would hurt trade. Interest rates would likely rise. The difference between the US and Britain was that Britian had a great dependence on trade. US trade is 13% of GDP, so I’m not sure how much less trade would impact GDP.
Certain companies would be harmed. Trump going around and making people hate the US is about the dumbest thing I have ever heard of. The Art of the Deal may really come back and bite us in the ass.
Great article as always, my man.
I'm one of those toxic Bitcoin maxis that everyone hates. Guys like me are going through a painful cognitive dissonance thing right now. We feel so strongly that Bitcoin is superior to gold in pretty much every way (can't counterfeit, predictable supply, highly divisible, easily transportable, zero carry costs, etc.) yet the market has spoken, and it's chosen gold as the "safe haven" asset.
Don't get me wrong. I'm glad I discovered Bitcoin eleven years ago. It's been a great hedge against fiat debasement. But all the time I spent in the Bitcoin echo chamber convinced me, with 100% percent certainty, that when the shit hit the fan, and things went sideways, and the dollar's supremacy was inevitably questioned, it would be Bitcoin, not gold, that would absorb all the safe haven money. Clearly I was wrong. I'm not smart enough to understand exactly *why* I was wrong, but here we are.
My only consolation is that I never talked anyone else into investing in BTC so at least my enthusiastic, but misguided views weren't a burden to anyone but myself.
I think it's that gold has been valuable for thousands of years, while Bitcoin is barely a decade old. You could imagine Bitcoin being seen in 100 years as a fad; not possible with gold.
Also, with Bitcoin, you have to believe in cryptocurrency AND you have to believe that BTC will continue to dominate the category despite having serious deficiencies compared to others.
My stepmother--who made herself a good pile of $$$, mainly in equities, before age made her stop--was an early-ish adopter of Crypto. Mainly Bitcoin; starting just before Trump1.
A savvy, non-institutional investor, she never saw it as anything more than a novel side hedge to equities investment, as she also had started buying tech stocks well before Bitcoin caught her eye.
Which is to say, maybe Crypto is currently just that to the global markets: a novel side-bet.
If you would've said that to me a few months ago, I'd say it were blasphemy. But you're right. That's exactly how it played out. Investors collectively and decisively placed Bitcoin in the speculative, high-beta tech stock bucket, not the "safe haven" bucket.
You were smart to get into BC early, and you'd probably be just as smart to hold onto your BC 20 years into the future. All investments tend to be cyclical and very unpredictable in the near future.
“A lot of people asked me whether gold’s rise as a share of reserves was due to people putting their money into gold, or to gold going up in price.”
I think this is a question about elasticity of the supply of gold to the market. An inelastic supply implies the latter: a small increase in demand results in a large increase in price but the actual quantity of gold being held doesn’t change much. If the supply is more elastic, then not only is the price increasing, the amount of gold being held has also increased and a large price increase is due to a large increase in demand.
The Russian sanctions (which I should say I am was and am not per se against as such [ETA: mealy mouthed, say cautiously for but same time worried about perverse side effects]) are to me something of a possible illustration of a problem for a class of threat which are most effective as deterents, but once one actually starts to use them rapidly induce "ecosystem" evolution away from the risk once the risk is made applied.
So are best left implied and unused as they will once one starts to use them, actually lose their power.
Certainly now there are many reasons for actors to want to reduce dollar payment exposure although the systematic effeciency of dollar still is a counterweight to that.
You shall not crucify mankind upon a cross of gold!
This was interesting but its assumption of a dollar dominated world economy being a stable one is very much a USA-based world view isn't it? How many other countries would beg to differ I wonder? Emerging markets, for instance, have often paid a high price. And, over the decades, many developed ones too. It's an aspect of the dollar's reserve currency "exorbitant privilege" that tends not to be acknowledged, or perhaps even noticed, by Americans
I wonder if there is an argument about decline of manufacturing employment in US and Germany that parallels the decline of farm employment.
The estimated percentage of the labor force engaged in agriculture fell from 41 percent in 1900 to 21.5 percent in 1930, to 4 percent in 1970, and to a mere 1.9 percent in 2000. Interestingly, peak manufacturing, 39% in WWII, is close to the agricultural number in 1900. Needless to say that shift from a dominant agricultural sector to a dominant manufacturing sector to today's economy was hugely disruptive. But people found new jobs and life went on.
The question in part is what jobs will be associated with a future economy and what will the mismatch be between the number and type of jobs theoretically available and the available labor force. I think this will keep economists (& Noah) guessing because there are billions of working people independently trying to find or create gainful employment.
Manufacturing employment isn’t coming back in any developed economy. The price of labor is too high for it to make sense.
If manufacturing grows, it will look like Tesla factories full of robots doing as much of the labor as possible. This is actually a good thing in the long run, as real economic growth is caused increased productivity per unit of human labor.
Interestingly, manufacturing has grown since the 1970s (and presumably before, but that’s where FRED’s data set starts), while employment has shrunk dramatically (especially since 2000). It really is only the impact of China since roughly 2010 that has stopped manufacturing growth in the USA:
https://fred.stlouisfed.org/series/IPMAN
https://fred.stlouisfed.org/series/manemp
When gold started going up, I was interested in how much the supply could shift to meet the new demand. I was shocked to learn that gold is mined at a rate of about 10 tons or well over $1 billion *per day*. I'm surprised gold prices can move that much, with that kind of ongoing supply. But the total stock of gold is over 200,000 tons, so maybe I shouldn't be that surprised.
Gold is also an industrial commodity, used very widely in electronics.
Interesting article. What industrial policies might work for the US in today’s conditions? What can we learn from other countries that are good at manufacturing?
The gold-as-fallback framing is right, but it misses one dimension. Central banks aren't just buying gold to hedge against dollar instability — they're also stockpiling physical commodities. The US just committed $12 billion to Project Vault for a civilian critical minerals reserve. China has been building strategic mineral stockpiles for over a decade. When major economies simultaneously build physical commodity reserves, the reserve currency question becomes secondary to the reserve resource question.
The deeper issue: if gold rises because institutions lose confidence in national currencies, and mineral stockpiles rise because nations lose confidence in supply chains, what does a world look like where physical assets replace financial assets as the foundation of state power? That's the financial anarchy worth watching.
If you want to read more about the RMB (what Noah calls the yuan like so many….) here is something I and Johannes Petry did about a year ago. I think we called it right—so expect more internationalization. https://www.chinakennisnetwerk.nl/publications/37-internationalization-rmb-status-options-and-risks