Global Gold ‘Fear Index’ Surging

A Washington 25-cent gold coin, first US president George Washington on obverse, bald eagle on reverse.kavalenkava/Shutterstock

Commentary

“Gold fever” is hitting the world at, well, fever pitch. The price of the yellow metal climbed over $2,360 per ounce this past week—and has risen by more than 8 percent in just the past three months and over 16 percent year over year. Now, typically, people buy gold as a hedge against inflation and currency devaluation. A big driver of gold prices has been rising demand from central banks, but there are also other forces at work as well.

High Demand for Gold in the US as Confidence Falls

For instance, right now, in the United States, inflation persists despite high interest rates, so it’s no wonder why people want to buy gold as a hedge. The overflow of immigrants at our southern border, the widening political divide in the country, trillions of dollars of deficit spending, and an overall lack of confidence in the future have Americans feeling high levels of uncertainty and doubt.

That’s why U.S. consumers are attracted to gold. It’s real and tangible, unlike printing machines or digitally created dollars that are just symbols on a computer screen. People understand that there’s a finite supply of gold in the world, and everybody wants some. What’s more, gold has always been used throughout history as a store of value.

Just how popular is buying gold in the United States at present?

Costco, where you can get gallon jugs of mayonnaise, is selling Swiss gold by the ounce for well over $3,000, with a limit of just two per member and no refunds. Needless to say, when even Costco is selling it, gold buying has hit the consumer level in the United States in a very big way. It’s a clear expression of fear by U.S. consumers, who are suffering from the high cost of basics like food and fuel.

Global Demand Rising from Fear and Banks

But gold is also in high demand around the world. According to JP Morgan, central bank buying has driven the rise in gold prices since 2022, and were more than double the average annual purchase across the prior decade.

Among the world’s central banks, the People’s Bank of China (PBC) was the largest buyer of gold in 2023. In fact, as the international geopolitical environment deteriorates, the PBC is continuing to increase its gold reserves to hedge against the falling value of the U.S. dollar, U.S Treasury bonds, and other dollar-denominated assets. There is also the desire to internationalize the yuan. A gold-backed yuan may prove to be desirable against a debt-ridden U.S. dollar backed only by a country with trillions of dollars of debt.

Of course, the PBC isn’t the only central bank stocking up on gold. According to UBS, numerous central banks are doing so to insulate themselves from the potential value decline of the dollar. In addition, nations with rising GDP such as India are buying more because they can afford to. In the case of Turkey, its gold purchases are in response to its failing currency, the lira.

Russia, too, has been acquiring higher gold reserves for years, and continues to do so earnestly in order to blunt the impact of U.S. sanctions and the freezing of Russia’s dollar-denominated assets. It even backed the ruble with gold in early 2022 as a way to stabilize its value.

Chinese Consumers Buying Gold, Too

But in China, it’s not just the PBOC that’s acquiring gold hand over fist. Chinese consumers are doing so as well, and for good reason. Over the past several years, the Chinese people have seen their wealth disappear before their eyes from cratering real estate prices, taxes, illegal investment schemes, stock market crashes, the effects of extended lockdowns, and the resultant work stoppages and job losses.

They’re also deeply concerned about the falling value of the yuan as the Chinese economy continues the meltdown inflicted upon it by the Chinese Communist Party (CCP). Gold is something the average Chinese person can actually hold in their hands, use to buy goods and services, and can carry with them, so it gives them a level of control over their immediate future.

In a very real sense, Russia’s war against Ukraine is helping to drive up the price of gold, of which they hold over $166 billion in reserves. But that’s not the only factor, not by a long shot.

War Driving the Fear and Uncertainty Index Higher

The underlying reason for much of the rising demand for gold is the undeniable fact that major changes are afoot in the world. People understand that tomorrow contains much less certainty than yesterday. As fear, uncertainty and doubt rise in the world, so too, does the demand and the price for gold.

What does that tell us about the levels of fear and uncertainty in the world?

Quite a bit, actually.

The war in Ukraine continues and is not going well for the Ukrainians and its European NATO allies and the United States. With nations such as France calling for European soldiers on the ground in Ukraine to prevent a Russian victory, the prospects for peace on the continent are fading fast. Widening the war beyond Ukraine would be disastrous for Europe, the United States, and stability in the entire region. A Russia–NATO war would shatter the postwar order and could quickly escalate to a global level.

The same risk presents itself with regard to the war between Israel and Hamas, and now with Iran as well. Both are also driving the uncertainty index through the roof. Threats to the oil supply chain immediately come to mind. With 25 percent of the world’s oil flowing through the Strait of Hormuz, which is just off the coast of Iran, the possibility of oil shortages and skyrocketing prices is all too real.

Finally, China poses an undeniable threat to the entire Asia-Pacific region, with Japan and the Philippines scrambling to shore up mutual defense agreements with a weakening United States.

All of these economic and geopolitical factors threaten the world’s economy and stability in major ways, which fuels fear and uncertainty. But not everyone is buying. Some are selling their gold at these record levels and cashing in.

But for the buyers—from banks to individuals—fear and uncertainty are keeping the price high.