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When the Dutch navy sailed up 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 undone”. He sent his wife and father out of London with the gold pieces in which he kept his wealth to bury them in a garden.
Today’s Chinese and Indian buyers of jewellery and bars are not the first people to trust in gold for financial protection. It does not pay any dividends and it is very heavy, but in periods of war, crisis, inflation and turmoil, it is comforting to have around. “When bad things happen, gold comes into its own,” says John Reade, market strategist for the World Gold Council.
So it is a troubling reflection of the times that gold is making a comeback from being written off as an anachronism by many investors. The price of gold reached a record high of $2,531 per 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 seller of gold then).
Central banks have returned to buying gold: particularly those of China, Russia and other countries that want to reduce their reliance on the US dollar. Chinese retail investors, unsettled by a property crisis and economic uncertainties, have piled into buying the metal. The world’s wealthy 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 escape being left out, the excitement has yet to reach gold miners. Unlike in California in 1848 and South Africa in the 1880s, exploration and mining companies have struggled to secure investment. Trading gold and derivatives is easier than mining and refining more metal.
“We are still depressed,” Nick Brodie, chief executive of Golconda Gold, a small Canadian-listed mining company, told me. In May, Golconda started to produce concentrate (powdered gold ore) from one part of a South African mine that it acquired when dormant in 2015. The mine was originally called Agnes after the wife of a British prospector who found gold there in 1888.
The problem for juniors such as Golconda is that production costs have risen and, as Brodie puts it, “every penny I make is sunk back into the mine”. The ore concentrate must be shipped to China to be refined and, while higher prices will one day produce higher profits, it will not reach full production for three years. Gold mining is not a get-rich-quick scheme.
There is already plenty of gold: the vaults of the New York Federal Reserve contain 507,000 bars, worth about $510bn at this week’s prices (the weight is borne by the bedrock of Manhattan island, 15 metres beneath sea level). London’s vaults, including those of the Bank of England, hold another 8,650 tonnes, worth $690bn. 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 arrived there in the same way that Pepys’s wealth was taken to a garden. During and after the second world war, many governments and investors transported their gold to what they trusted was a safe haven overseas. It is extremely well guarded and many have not seen the need to move it again.
The stash is becoming more precious, which speaks to deep fears among investors. The price of gold tends to jump during crises, such as the invasion of Ukraine by Russia in 2022, as investors flee from risky assets. The effect lingered after G7 countries responded to the invasion by freezing Russia’s foreign exchange reserves: gold held in Russia would have been less vulnerable.
As countries including Russia, China, India and Kazakhstan try to “de-dollarise”, the purchases of gold by central banks have risen in the past two years. Central banks say they are also buying more gold because they are concerned about the long-term risks of higher inflation. That is not comforting news, given that it is their job to keep inflation controlled.
Gold bugs warn luridly of currency debasement and financial collapse. Robert Kiyosaki, the author and investor, wrote of an “everything bubble” this April. “Save yourself. Please buy more real gold, silver, bitcoin.” For worriers, there has been plenty to worry about this year: bitcoin has also risen, encouraged by renewed belief in cryptocurrencies and doubts about the dollar.
But memories are short. Gold was in favour after the 2008-2009 financial crisis, when fears that inflation would be stoked by monetary easing led to the price surpassing $1,900 per ounce in 2011 (higher in real terms than today) before dropping again. This week’s excitement could prove equally temporary: inflation may keep on falling and the geopolitical stresses ease.
Still, gold is treasured when the world goes badly wrong. “At night my wife and I . . . walk and talk again about our gold, which I am not quiet in my mind to be safe,” Pepys wrote a few days after the Dutch raid. Luckily, England endured and he got most of it back.