Gold has been in the news a lot lately, for a number of good reasons: the price surge to beyond US$2,800 an ounce, exchange rate volatility, and a resurgence of inflation fears.
There is also speculation that at least some central banks could revalue their huge gold stocks from “official” to market value. This is especially intriguing where the Federal Reserve is concerned; if the US central bank does decide to revalue its gold hoard, that could give a lead to others.
Christopher Wood, global head of equity strategy at investment banking firm Jefferies, wrote in his Greed and Fear newsletter earlier this month that “such expectations [of a price revaluation] have been raised by [US Treasury Secretary] Scott Bessent’s pledge to ‘monetise the asset side’ of the US balance sheet”.
Central banks are able to influence the price of gold because of their vast holdings – they collectively own around one-fifth of the world’s total gold stocks – and any price revaluation by these institutions would be seen as an official endorsement of its enhanced value.
At the same time, the precious metal is a key asset that can help them protect their reserves during periods of current market volatility. For example, when the dollar falls, the price of gold generally rises.
Back in 1944, the Bretton Woods Agreement established a new international monetary system that pegged foreign exchange rates to the price of gold, which was valued then at $35 an ounce. In 1972, the US raised the official price to $42.22 an ounce before abandoning the gold standard in 1976.
The US Treasury still values its gold holdings at $42.22, a price that puts its holdings of around 280 million ounces at only around $11.8 billion instead of a much higher $784 billion if marked at the current market price of around $2,800 an ounce.
Emerging markets lead
An analysis published by investment house Nomura last July quoted John Reade, chief market strategist at the World Gold Council, as saying that nearly three-quarters of consumer demand for gold over the last ten years has come from emerging markets.
This was a shift away from previous decades when two-thirds of demand originated from Europe, North America and Japan. “Emerging market buyers have wrested control of the gold market from the West,” Reade said.
According to the report, gold has evolved to become one of the most financialised commodities, with 38% of average annual net demand coming from investment and 18% being bought and kept by central banks as part of their reserves. The balance is used in jewellery and technological devices.
Current political uncertainty in the US has also made investors consider adding gold to their portfolios. Meanwhile, the price of gold continues to break away from historical correlations, such as with 10-year US treasury yields, and has also defied the rise in the dollar.
At the time of Nomura report in July 2024, gold was around $2,360 an ounce. Since then, it has soared to an all-time high and some analysts predict it could breach $3,000 an ounce before long.
Emerging market central banks have bought gold every year following the 2008 global financial crisis. Their pivot towards gold is driven by several factors, including sanctions against Russia, inflation, and the move towards de-dollarisation.
Nevertheless, it will take years if not decades for emerging market central bank gold reserves to reach the level of Western economies, according to Nomura.
