The days of wandering the inaccessible Rockies in search of a vein of gold they may be over, but the frenzy that causes the precious metal is still there, and this period we are going through is such, notes Politico.

As war, ideology and protectionism divide the world, developing countries in particular are hoarding gold bullion, waiting for the day when the global financial system, dominated by USA and her Europewill collapse and a new one will take its place.

This trend, which started a decade ago, has spread this year due to more short-term factors, mainly due to the global drop in interest rates. As a result, gold prices went from record to record, closing above $2,800/oz for the first time last week.

This year, gold has risen 35%, well ahead of the 20% rise in US stocks and more than double what any European stock index can boast. Goldman Sachs’ Lina Thomas sees the gold price breaking above $3,000 by the end of next year.

At the heart of the rally are central banks, particularly those that are – or fear they could be in the future – under US sanctions. China has bought 316 tons since the start of the war in Ukraine. Russia has also been a big buyer, as have central banks in the Middle East, Central Asia and India.

More recently, the gold market has been dominated by two countries whose history and recent experiences have sensitized them to geopolitical risk: Poland and Hungary.

Poland has long wanted its reserves to be 20% covered by gold. Hungary’s National Bank bought gold for the first time in three years in September, saying: “Amid growing uncertainty gold is of particular importance as it boosts confidence in the country and helps financial stability.”

Other officials put it more bluntly.

“It is sign of impending wars” said a European central banker, without being named.

The trend is not only due to the fear of hostilities and sanctions, but also to the lost credibility of the states that built the post-war global economic order.

Both the US and Europe have been piling up debt for years that looks unsustainable in the long term, the International Monetary Fund said at its annual meeting.

With US debt now at 124% of GDP and rising, “many central banks hold most of their reserves in US Treasuries, and policymakers may be increasingly concerned about their exposure to fiscal risks in the US,” noted Goldman Sachs’ Thomas.

The central idea is to slowly diversify international stocks away from large dollar-based assets, said Mohamed El Erian, a former Pimco boss. The dollar still accounts for about 58% of the world’s foreign exchange reserves, making it absolutely essential for any kind of cross-border trade, but that’s down from about 65% just a decade ago.

The neutrality and immutable nature of gold make it a suitable “anchor” for a parallel financial system that is still being built: a system that the US will not be able to dominate or manipulate.

They woke up late

Policy makers in the West are just beginning to understand the risk.

Speaking in Washington at the IMF’s annual meeting in October, the president of the European Central Bank Christine Lagarde noted that “China is buying gold like never before” and spoke quietly about attempts to pressure other currencies.

“The role of a currency should never be taken for granted,” he said.

However, back in Europe, she sounded more relaxed, telling Le Monde last week that the dollar would not be dethroned. This may be partly due to evidence from last month’s summit of the so-called BRICS+. While BRICS meetings have often generated anti-dollar rhetoric, the latest summit’s communique focused on the evils of US sanctions but otherwise threw its weight behind reforming existing institutions such as the IMF.

“Although these are separate efforts,” El Erian said, “they can come together to gradually erode the absolute dominance of the dollar and the dollar payment system.”

BRICS and private investors

Equilibration will take time. While advanced economies hold up to 70% of their reserves in gold, BRICS central banks typically hold around 10%, with most of the rest in dollars. This means they are likely to remain buyers of gold in the long term, even if – as with the People’s Bank of China – they can hold back when they think prices are too high.

But private investors around the world, as is often the case, are challenging them and moving at their own pace in the market.

Traditionally, gold prices have been correlated with central bank interest rates. When yields on savings and bonds rose, as they have since 2022, gold usually moved in the opposite direction because it doesn’t offer returns. But this time the situation seems to be different. Gold prices rose during most of the period when central banks raised interest rates – and rose even faster as the US Federal Reserve (Fed) and the European Central Bank began to cut them.

“Traditionally we wouldn’t have considered it,” said David Wilson, director of commodity strategy at French bank BNP Paribas. “But it is clear that central bank activity has fueled the psyche of speculative investors. If they see central banks buying gold, they say ‘we should buy too’.”

“Like Grandfather’s Old Gold Watch”

As in the past, today’s anxiety over gold suggests a heightened desire for credibility amid uncertainty and waning trust in institutions, analysts say.

“In times of crisis people flock to gold,” said Krishan Gopaul, senior analyst at the World Gold Council. “It’s a universal asset that people value and know will be accepted by others.”

And that value is rising alongside doubts about the value of other assets, even the mighty dollar.

“Gold has been a symbol of trust for 3,000 years,” said Salvatore Rossi, historian and former deputy governor of the Central Bank of Italy. “Gold bullion for central banks is like a family’s old gold grandfather clock: it’s the last asset, the one you wouldn’t sell, but everyone knows you have.”