Gold Gone Rogue
Is there Significant Signal in the Sudden Surge?
During a significant surge in March and April of this year, the gold price recorded several consecutive new all-time highs, topping out at $2420 before pulling back and hovering around $2300 at the time of writing. This new high marked a significant 16.8% increase above its previous peak of $2073, first reached in 2020. In this article, I will take a closer look at potential economic signals contained in this recent price breakout.
1. WTF Happened in 2022?
Despite a strong inverse correlation with the US 10-year Treasury real yield (US 10-year Treasury yield adjusted for inflation expectations) over the past decades, this relationship notably dislocated post-2022. See the chart below.
This shift in 2022 necessitates a more thorough analysis of the fundamental causal mechanisms underlying the inverse correlation between the gold price and real yields, which hinges on two main ideas:
Non-Yielding Nature of Gold
Traditionally, as the real yields on U.S. 10-year Treasuries rise, yield-bearing assets (such as Treasury bonds) become more attractive compared to non-yielding assets like gold. Consequently, as real yields have surged since the US Federal Reserve (Fed) began its aggressive interest rate hikes in March 2022, one might logically expect capital to flow from gold into Treasuries, which would in turn depress the price of gold. However, as seen in the graph above, this anticipated move has not materialized.
Safe-Haven Asset Dynamics
Both gold and Treasury bonds are considered safe havens during periods of market uncertainty, driving up prices of both assets. The increased bond prices, inversely affects bond yields due to their mechanical pricing relationship. (As bond prices increase, their yields decrease because the yield is determined by dividing the coupon payment by the price of the bond). Therefore, as gold and Treasury bond prices increase during times of uncertainty, bond yields decline.
In 2022, several key developments altered investor behavior towards US Treasuries and gold which could shed some light on the observed breakdown in the inverse correlation:
1.1 A Bursting Chinese Property Bubble
Following economic reforms and the opening up of the Chinese economy in 1978 under Deng Xiaoping, Chinese households have used local real estate as their preferred store-hold of wealth. This trend stems from several factors:
- Government monetary policies have maintained unappealingly low interest rates on bank deposits,
- Capital controls have restricted the outflow of money (wealth) abroad, and
- A general mistrust in the Chinese stock market due to government interference and underdeveloped market infrastructure made Chinese stocks unattractive as a store of wealth.
A 2019 survey by the PBOC revealed that between 66–70% of Chinese private wealth was held in local real estate. The vulnerability of this sector was exposed when the major Chinese property developer Evergrande defaulted on its financial obligations in 2021, leading to its eventual collapse in 2023. The chart below illustrates the downturn in Chinese property price appreciation, which began in 2019 and turned negative by April 2022:
The most viable alternative to property for Chinese citizens to preserve their wealth is gold. The chart below provides an illustration of the accelerated inflows into gold ETFs by Chinese households in 2022:
H/T to Alexander Stahel (@BurggrabenH) and Jan Nieuwenhuijs (@JanGold_) for their research on the China effect and central bank gold purchases. Follow them on X for valuable insights.
1.2. Geopolitical Tensions and Asset Seizure
The U.S. government’s decision to freeze Russian-held Treasuries following the invasion of Ukraine in 2022 was a watershed moment, significantly altering global perceptions of the safety and liquidity of U.S. Treasuries as a reserve asset. Since this development, the international conversation about “Dedollarization” has gained considerable traction — particularly among BRICS nations, which are now promoting the idea of a new gold-backed BRICS currency. The chart below demonstrates the accelerated decline in US Treasury holdings by the People’s Bank of China (PBOC), the largest central bank within the BRICS group, that started in 2022.
Note that I have mentioned the BRICS nations as an example here, but this trend is not limited to this grouping alone.
1.3. U.S. Fiscal Policy and Treasury Issuance
Concurrently, the U.S. faced (and is still facing) ballooning government deficits, necessitating increased Treasury issuance. This rise in supply came at a time when demand for Treasuries was waning — partially due to growing skepticism about the U.S. government’s ability to repay its debt without resorting to inflationary measures. Or to put it more bluntly: There are rising concerns that the US Federal Reserve will have to print money to buy the government’s debt, as no one else is interested. The chart below shows the ballooning government deficit in red, and the debt issued to finance it in grey.
1.4. Diversification of Reserves
In response to the developments discussed above, foreign central banks started to diversify their reserves by increasing their holdings in gold relative to U.S. Treasuries, reflecting a strategic shift towards what they perceive as a more stable store of value. The chart below indicates the step up in Central Bank purchases of gold in 2022.
These factors collectively contribute to the reduced demand for U.S. Treasuries, with investors and central banks increasingly preferring gold, despite its non-yield-bearing nature as more and more investors no longer deem the yield to be adequate compensation for the increased risk of holding US Treasuries.
The chart below illustrates the consistent downward trend in the US 10-year Treasury yield over a 40-year period, up until 2022 when a decisive break occurred. This trend-shift highlights the need for higher yields to attract investors to these assets, which are no longer as sought-after as before.
2. A Potential Pivotal Point of Paradigm
The dislocation of the inverse relationship between the gold price and Treasury real yields in 2022 could represent a pivotal moment in history, signalling the start of a shift from the existing debt-based financial system towards a new framework grounded in non-debt money. Speculating on what such a system might look like strikes me as a juicy topic for a future article. Stay tuned….
3. Non-Debt Money
The prevailing global financial architecture is fundamentally anchored to the U.S. Dollar, which serves as the primary reserve currency, underpinned by U.S. Treasuries. These are essentially promises of repayment by the U.S. government. Should they default on these obligations, whether through outright default or by repaying with devalued dollars, the repercussions are unequivocal — you receive nothing more. In contrast, non-debt-based assets like gold or Bitcoin operate independently of such promises. They are forms of trustless money, not contingent on any entity’s promise to deliver.
Alongside gold, this flight to non-debt money also extends to Bitcoin, which has been increasingly recognized as a similar hedge against monetary inflation. Similar to gold, Bitcoin has also made new all-time highs in recent months as seen in the chart below — though it has thus far failed to hold on to those new highs.
The institutional validation of Bitcoin as a new asset class is evidenced by the significant inflows over the past three months into newly listed Bitcoin ETFs in the U.S., which further underscores the asset’s growing acceptance and integration into mainstream investment portfolios. See the chart below showing the inflows of capital into the new Bitcoin ETFs.
In a recent post by Ray Dalio, the founder of the world’s largest macro hedge fund Bridgewater Associates, he notes gold and crypto as the only non-debt money he knows of. You can read his article here:
4. My Crypto & Gold Strategy
The Crypto and Gold strategy in my long-term core portfolio has grown to 11.8% of total assets, reflecting my strategic response to the rising risk of monetary inflation and the increasing effectivity of Bitcoin and gold as hedges. You can follow the performance of this long term, low volatility portfolio here:
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Good luck out there.
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Disclaimer
The views expressed in this article are the views of Johan Kirsten and are subject to change at any time based on market and other conditions. This is not financial or investment advice, nor a solicitation for investment funds and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.
