The gold price surged past $US5000 an ounce last Friday, taking its rise since Donald Trump regained the US presidency to 80 per cent. Is that a coincidence or is something more structural occurring?
One thing that is definitely not a coincidence is that the soaring gold price has occurred as the US dollar has depreciated sharply. Since Trump’s inauguration, the dollar is down more than 10 per cent.
Gold and the dollar are inversely correlated – when the dollar is weak, gold is strong and vice versa – because, with gold denominated in US dollars, a weaker dollar makes it cheaper for non-US investors to buy gold and other commodities.
With US shorter-term interest rates now relatively low thanks to three Federal Reserve Board rate cuts last year (unlike longer-term rates, which are higher than before the Fed started cutting rates), the opportunity cost of investing in a commodity that generates no income, but does have storage, security and insurance costs, has also diminished.
The recent surge in the gold price didn’t start with Trump. It started with the freezing of $US300 billion-plus of Russia’s foreign exchange reserves in 2022, after the invasion of Ukraine, which provided a demonstration of the vulnerability of central bank reserves to US-led actions. It has, however, significantly accelerated since he returned to the White House.
It continues to accelerate. After rising 64 per cent last year it has jumped another 15.6 per cent this year.
The rise and rise of the gold price and the slide in the dollar can be attributed to a range of influences.
The most fundamental is the blowout in US government debt, which was about $US36 trillion ($52.1 trillion) before the return of Trump and is now more than $US38 trillion and rising as the tax cuts in the One Big Beautiful Bill Act start to flow through.
That has raised fears that the US will be forced to debase its currency, and foreigners’ holdings of US assets, US Treasuries in particular, by pursuing loose monetary policies that feed into higher inflation rates.
Trump hasn’t helped dispel those fears by making it very clear that he wants much lower US interest rates, regardless of the economic circumstances, and is prepared to try to stack the Federal Reserve Board to achieve his objectives. His lawfare against the Fed’s chair, Jerome Powell, and a sitting governor, Lisa Cook, have fuelled those fears.
If investors don’t trust the Fed to make independent decisions based on their assessment of the balance of risks between inflation and unemployment, they will sell US assets and look for other reserve assets, with gold perhaps the most obvious alternative liquid store of value.
It’s not just US deficits and debt unsettling investors and causing a steady drift towards gold.
Trump’s first year of his second term has been chaotic and generated a raft of uncertainties and risks for other countries and their economies.
One of the significant milestones in gold’s now-lengthy succession of record levels was April 1 last year, when Trump’s announcement of his “Liberation Day” tariffs – his trade war on the rest of the world – kick-started another plunge by investors into the precious metal.
That, and his assaults on the multilateral institutions and relationships that have upended more than 40 years of post-war norms, have increased geopolitical risk and created a risk premium for investing in US Treasuries, previously regarded as the world’s safest asset class.
It hasn’t helped that Trump’s domestic economic and social policies and the weirdness of his behaviours and the nature of the administration have added to the sense of chaos and risk.
America’s brutal approach to regime change in Venezuela, Trump’s bizarre threats to invade or use tariffs to gain ownership of Greenland and his most recent threat of 100 per cent tariffs on Canada if it does a trade deal with China have caused even America’s strongest allies to consider how they might protect themselves from Trump and his pliant administration, Republican-dominated Congress and Supreme Court.
If you’re looking for a haven in a tumultuous world, there aren’t obvious alternatives to the US dollar and the US bond market.
China’s renminbi, without a deep and liquid bond market, the ability to move capital freely and a trusted legal system, doesn’t meet the criteria.
The euro could be an alternative if it had a deeper bond market, its capital markets were less fragmented and the economic policies of its members were more harmonised, but it isn’t there yet.
That leaves gold, and therefore it isn’t surprising that central banks – particularly those like China, or Turkey, or the eastern Europeans who saw the freezing of Russia’s assets as a preview of their own vulnerabilities – have been piling into gold.
The “sell America, buy gold” trade hasn’t been a rush for the exits, but rather a consistent but modest winding back of their exposures to US Treasuries by countries like China, India, Brazil and others and a steady increase in their gold reserves.
It hasn’t helped that Trump’s domestic economic and social policies and the weirdness of his behaviours and the nature of the administration have added to the sense of chaos and risk.
It’s unlikely that we would see a large-scale dumping of foreign-owned US assets – that would cause self-harm – but China’s peak holdings of US Treasuries was $US1.3 trillion more than a decade ago. Today they are $US682 billion – it has managed to nearly halve its exposure without causing disruption to the markets or generating losses from the sales.
If the loss of trust in the US is permanent, it is likely that the efforts by foreign governments and their central banks to diversify their reserves will continue, with implications not just for dollar dominance, but for the cost of US government and corporate borrowings. America’s former status as the world’s financial haven effectively created a subsidy – an “exorbitant privilege” – for US borrowers.
Over time, then, Trump may have greatly accelerated the creeping undermining of the US dollar’s dominance and the dominance of the US bond market in global finance that had already been occurring before he re-took the White House.
There has been an implicit assumption that the US would never have to be concerned about a government debt crisis because of the centrality of its markets’ roles in global finance and the global economy. Trump seems to be undermining that assumption, almost on a daily basis, raising the risk of an eventual US economic crisis.
That’s great for foreign investors in gold, but not so much for America and Americans.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.