Gold: A Relic or the Future? Navigating Gold's Soaring Prices and its Role in Currency

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Gold has long been a cornerstone of the global financial system, revered for its intrinsic value and historical role in backing currencies. In 2024, its significance has once again surged into the spotlight. Soaring to record highs, the price of gold reflects its enduring appeal as a hedge against uncertainty, particularly during geopolitical instability and changing economic policies. Alongside its rise, questions linger about its future role in currency systems like the U.S. dollar. This article explores gold’s current rally, the factors driving it, and the ongoing debate over whether gold can—or should—support modern currencies.

The Rise of Gold Prices in 2024

Gold prices have been on an unprecedented rise throughout 2024, hitting record highs as investors seek refuge from geopolitical tensions and economic uncertainty. By late October, gold had surged by 32%, outpacing other major indices like the S&P 500 and the Nasdaq, which grew 23% and 28%, respectively. The heightened demand is driven by several key factors, ranging from U.S. Federal Reserve policies to global geopolitical instability.

At the heart of this rally is speculation about the Federal Reserve’s interest rate strategy. Historically, gold thrives in a low-interest-rate environment, and with the Fed signaling a series of rate cuts, investors have flocked to gold as a safe-haven asset. Following the Fed’s first rate cut in over four years last month, the likelihood of another reduction remains high, with a 90% chance of an additional quarter-point rate cut next month. This outlook has pushed gold prices even higher.

In addition to the Fed’s actions, central banks worldwide, particularly China’s, have accumulated gold to reduce reliance on the U.S. dollar. China’s central bank, the People’s Bank of China, had been purchasing gold for 18 consecutive months until mid-2024, although it has since paused its acquisitions. Still, the large-scale purchases made by central banks globally over the past two years, totaling more than 1,000 tons annually, have fueled the recent surge in gold prices.

Beyond the direct financial drivers, heightened global uncertainty has also played a significant role. Tensions in the Middle East and the impending U.S. presidential election have created an unpredictable geopolitical climate, and many investors have sought the stability of gold. Political analysts point to the upcoming election as a vital source of this uncertainty, as the absence of a clear frontrunner has left markets jittery. Investors typically turn to gold when such instability looms, a historically stable asset that transcends short-term economic fluctuations.

However, experts caution that gold’s meteoric rise may not be sustainable in the long term. Prices could retreat once the geopolitical situation stabilizes or when the Federal Reserve adjusts its policy. As Jim Wyckoff, a senior market analyst at Kitco Metals, aptly notes, “Gold is at a new record high, but once it hits its peak, it will probably back off of it. Nobody knows when.”

Can Gold Back the U.S. Dollar?

While gold’s rising prices reflect its strength as an investment, its suitability for supporting the U.S. dollar is a separate issue. Despite calls from some quarters for a return to a gold standard—a system where the value of a country’s currency is directly tied to its gold reserves—current data shows this is not feasible.

The U.S. government holds the largest gold reserves in the world, with around 261.5 million troy ounces (equivalent to 8,133.5 metric tons). Valued at approximately $489 billion, these reserves are significant but insufficient to back the entire U.S. money supply. The U.S. M2 money supply, which encompasses cash, checking deposits, and easily convertible near-money, totals over $20 trillion. To back this with gold at current prices, around 272,430 metric tons of the precious metal would be required—far more than the 212,582 metric tons of gold ever mined in human history.

Even if the U.S. used its entire gold reserve to support the dollar, it would only cover a fraction of the current money supply. This shortfall highlights the limitations of returning to a gold-backed currency. The gold standard was precisely abandoned in the 20th century because of these limitations. As the global economy expanded, the supply of gold could not keep pace with economic growth, leading to frequent financial crises and constraints on monetary policy.

In the modern era, mainstream economists argue that returning to the gold standard would severely restrict the Federal Reserve’s ability to manage the economy. Central banks would lose the flexibility to adjust interest rates or expand the money supply in response to crises. Such limitations could lead to prolonged recessions or deflation in economic downturns or financial panics. Deflation, in particular, poses a significant risk, as the economy could shrink faster than the supply of gold, triggering a cycle of falling prices and wages.

Moreover, a fixed gold-to-dollar ratio would leave the economy vulnerable to external shocks. If a country experienced a sudden loss of gold reserves due to market fluctuations or geopolitical events, it would have limited means to respond. This lack of flexibility could exacerbate global instability, as economic shocks in one country could easily spread to others.

The Global Supply of Gold and its Economic Implications

The global supply of gold is another crucial factor in understanding its limitations as a currency backing. As of the end of 2023, the world’s total above-ground gold stock is estimated to be around 205,238 metric tons. While annual gold production continues steadily, with major producers like China, Australia, and Russia contributing significantly, it’s unlikely that enough gold will be mined in the foreseeable future to support large-scale economic systems like the U.S. dollar.

Furthermore, a substantial portion of global gold demand comes from non-monetary uses, particularly in the technology and jewelry sectors. In 2023, the jewelry industry alone consumed around 2,195 metric tons of gold, representing nearly half of total demand. This continuous demand for gold in other industries limits the amount available for potential use as a currency backing.

In response to these realities, some economists and policymakers have explored alternative ways to strengthen the U.S. dollar, such as tying it to a broader basket of commodities or digital currencies. However, none of these proposals have gained widespread acceptance, with the prevailing consensus being that the fiat currency system—where the value of money is not directly linked to physical commodities—remains the best option for modern economies.

Gold's Dual Role in Modern Finance

Gold’s soaring prices in 2024 reflect its historical importance and ongoing relevance as a hedge against uncertainty. However, while it may provide a haven for investors during times of turmoil, its potential as a foundation for modern currencies like the U.S. dollar is severely limited. The gap between the current supply of gold and the growing needs of the global economy makes a return to the gold standard not only impractical but risky. As central banks, investors, and policymakers navigate this complex financial landscape, gold will likely remain a critical asset. However, its role will be confined to investment rather than a direct backing for the world’s currencies.

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Disclaimer: This newsletter is for informational purposes only and should not be construed as financial or political advice.

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