Gold trades near $5,000 an ounce, a seemingly paradoxical calm amidst escalating global tensions. The United States and Israel are engaged in conflict with Iran, foreign central banks are shedding Treasury bonds, and bond yields are defying expectations – yet gold barely reacts. This isn’t the behavior of a “barbarous relic,” as economists have long insisted, but of something far more resilient.
The dismissal of gold began a century ago with John Maynard Keynes, who envisioned a future dominated by expertly managed currencies. His vision took hold at Bretton Woods in 1944, relegating gold to a symbolic role, a figurehead rather than a foundation. Economists believed they had caged the ancient metal, confining it to the past.
But gold had a way of escaping its confines. In 1971, President Nixon severed the dollar’s link to gold, a move celebrated by economists like Milton Friedman. They predicted a smooth transition to a system of floating exchange rates, confidently declaring gold a historical footnote. They were profoundly wrong.
Within nine years, gold surged from $35 to $850 an ounce – a staggering 2,300% increase. The 1970s, intended to showcase the superiority of managed currencies, instead delivered stagflation and a collapsing dollar. Cash lost 87% of its value, while the “barbarous relic” quadrupled in worth. Gold claimed the second round.
Paul Volcker, as Federal Reserve Chairman, attempted to regain control in 1979, raising interest rates to 20% to crush inflation. Gold faltered, falling to $255 by 1999. European central banks, in a display of institutional disdain, actively sold their reserves, culminating in what became known as “Brown’s Bottom” – a disastrous sale timed perfectly with the market’s lowest point.
The economists seemed to have secured a decisive victory. However, the 2008 financial crisis shattered that illusion. Lehman Brothers collapsed, governments unleashed trillions in stimulus, and real interest rates plunged into negative territory. Gold, predictably, remembered its purpose, climbing from $800 to $1,921 by 2011. The institutions built on managed money struggled to respond.
The most significant shift, however, wasn’t about inflation; it was about trust. In February 2022, the United States and its allies froze $300 billion in Russian central bank reserves. A clear message resonated globally: assets held in Western currencies were vulnerable to confiscation. Only one major reserve asset remained untouchable.
Gold offered a sanctuary – immune to SWIFT freezes, court orders, or monetary manipulation. It required no trust in institutions or governments. This realization fueled a record-breaking gold buying spree in 2022, with central banks acquiring 1,080 tons, the highest volume since the gold standard era. China, India, Turkey, Poland, and Singapore were among the buyers, acting on the lessons learned from the Russian sanctions.
For the first time since 1996, global central banks now hold more gold than US government bonds. This milestone, largely unnoticed, signifies a fundamental change in how sovereign institutions view reserves. It’s not simply inflation hedging; it’s geopolitical insurance, a profound vote of no confidence in the existing financial order.
The current gold rally differs from previous ones. Past surges were driven by retail investors and inflation fears. This one is fueled by deliberate, long-term strategic decisions made by sovereign institutions. It’s a response to a world where the safety of dollar-denominated assets is increasingly questioned.
The recent conflict involving Iran has only reinforced this trend. In past crises – the pandemic, the war in Ukraine, the European debt crisis – the conventional haven was US Treasuries. This time, foreign central banks have sold $82 billion in Treasuries in just five weeks, driving yields higher. The flow of petrodollars back into US debt has stalled as the Strait of Hormuz faces disruption, while gold maintains its elevated price.
Gold doesn’t thrive solely on high inflation; it flourishes when trust in monetary institutions erodes. It performs when central banks recognize the need for an asset beyond the reach of government control. This condition existed before the Iran war and will persist long after.
Keynes was correct that gold’s monetary role is a convention, not a natural law. However, he underestimated the enduring appeal of a convention that combines liquidity, durability, and freedom from political risk – especially when the alternative is maintained by the world’s largest debtor and a major participant in global conflict. Gold has been articulating this argument for 5,000 years, and the economists have had only 300 to counter it. Currently, the metal is winning.
An intriguing parallel to gold’s resurgence is the emergence of Bitcoin, invented in 2008. Like gold, Bitcoin offers a fixed supply, immunity to debasement, and independence from governmental control. It mirrors gold’s fundamental logic, presenting a modern echo of an ancient safeguard.
