The new gold rush reflects the world’s deep worries

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When the Dutch navy sailed into the Thames estuary in 1667 and launched a surprise attack on British ships, the naval administrator and diarist Samuel Pepys panicked that “the whole kingdom is destroyed”. He sent his wife and father out of London with the gold pieces in which he kept his fortune to bury them in a garden.

Today’s Chinese and Indian buyers of jewelry and bars are not the first people to trust gold for financial protection. It doesn’t pay dividends and it’s very hard, but in times of war, crisis, inflation and turmoil, it’s comforting to have around. “When bad things happen, gold becomes itself,” says John Reade, market strategist for the World Gold Council.

So it’s a worrying reflection of the times that gold is making a comeback after being written off as an anachronism by many investors. The price of gold hit a record high of $2,531 a troy ounce on Tuesday, five times the inflation-adjusted price the UK got when it sold some gold reserves a quarter of a century ago (Switzerland was, also a big gold seller back then).

Central banks are back to buying gold: especially those in China, Russia and other countries that want to reduce their dependence on the US dollar. Chinese retail investors, unsettled by a housing crisis and economic uncertainties, rushed to buy the metal. The world’s rich are also buying more gold, and US hedge funds have followed the market trend.

If this week had the makings of another gold rush, with all sorts of buyers scrambling to avoid being left out, the excitement has yet to reach gold miners. Unlike California in 1848 and South Africa in the 1880s, exploration and mining companies struggled to secure investment. Trading gold and derivatives is easier than mining and refining multiple metals.

“We’re still depressed,” Nick Brodie, chief executive of Golconda Gold, a small Canadian-listed mining company, told me. In May, Golconda began producing concentrate (powdered gold ore) from part of a mine in South Africa that it acquired when it was idle in 2015. The mine was originally named Agnes after the wife of a British prospector who found gold there in 1888.

The problem for juniors like Golconda is that production costs have gone up and, as Brodie says, “every penny I make is sunk back into the mine.” The ore concentrate has to be shipped to China to be refined, and while higher prices will one day produce higher profits, it won’t reach full production for three years. Gold mining is not a get-rich-quick scheme.

There’s already plenty of gold: the New York Federal Reserve vaults contain 507,000 bars, worth about $510 billion at this week’s prices (the weight is supported by the bedrock of Manhattan Island, 15 meters below sea level) . London vaults, including those of the Bank of England, hold another 8,650 tons, worth $690 billion. A lot of gold is mined and then buried again.

The gold guarded by the New York Fed is not its property: much of it got there in the same way that Pepys’ fortune was taken to a garden. During and after World War II, many governments and investors shipped their gold to what they believed to be a safe haven overseas. It is extremely well guarded and many saw no need to move it again.

The reserve is becoming more and more precious, which speaks to the deep fears of investors. The price of gold tends to rise during crises, such as Russia’s invasion of Ukraine in 2022, as investors flee risky assets. The effect persisted after the G7 countries responded to the invasion by freezing Russia’s foreign exchange reserves: gold held in Russia would have been less vulnerable.

As countries such as Russia, China, India and Kazakhstan seek to “de-dollarize,” gold purchases by central banks have increased over the past two years. Central banks say they are also buying more gold because they are concerned about the longer-term risks of higher inflation. This is not comforting news, given that it is their job to keep inflation under control.

Gold bulls strangely warn of currency devaluation and financial collapse. Robert Kiyosaki, the author and investor, wrote about an “everything bubble” in April. “Save yourself. Please buy more gold, silver, real bitcoin.” For those concerned, there’s been plenty to worry about this year: Bitcoin has also rallied, buoyed by renewed faith in cryptocurrencies and doubts about the dollar.

But memories are short. Gold was buoyant after the financial crisis of 2008-2009, when fears that inflation would be fueled by monetary easing saw the price surpass $1,900 an ounce in 2011 (higher in real terms than today), before falling from new. This week’s excitement could prove just as temporary: inflation could continue to fall and geopolitical stress to ease.

However, gold is valued when the world goes wrong. “At night, me and my wife. . . walk and talk again of our gold, of which I am not silent in my mind to be safe,” wrote Pepys a few days after the Dutch raid. Fortunately, England held on and got most of it back.

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