Here’s Why Investors Can't Get Enough of Gold
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I'm Stephen Carroll and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg. In a world of increasingly complex ways to invest your money, it's easy to forget that one of the most trusted assets is still a metal dug out of the ground. Gold continues to go from strength to strength. Once again, all-time record highs. We're heading towards recession.

buy some of this rock. Was it just gold for everyone? Yeah, it certainly seems that way. We see four things. Stocks go down, bonds go down, the dollar goes down, and gold goes up.

During the market turbulence that's followed Donald Trump's return to the White House, gold has shone more brightly than ever. Investors seeking refuge from wild swings in stocks, bonds and currencies have pushed gold prices to record after record. Not everyone's a fan though. Here's legendary investor Warren Buffett speaking at Berkshire Hathaway's annual meeting in 2005. I don't see gold as a store of value and the truth is it hasn't worked very well, turning out about 3,000 or 4,000.

Tons of gold a year. You know, we take it out of the ground in South Africa and we put it in the ground at Fort Knox or someplace, you know, or the New York Fed. And it doesn't do much along the way for anybody. And yet gold's appeal hasn't faded in the 20 years since. It's actually increased. Here's why investors can't get enough of gold. Our precious metals reporter Jack Ryan joins me now for more. Jack, first of all, remind us, why is gold conspicuous?

considered a safe haven. I think I should start by saying that most financial assets derive their value from the future income stream they're going to grant you. So you buy a bond, it's for the future income stream. You buy a share, it's for a share of the future profits. And you're ultimately relying on your counterparty to deliver on that. And so when you enter environments like we've seen over the last few weeks and months where the future becomes very uncertain, you might start to question your counterparty's ability to do so. And then in that environment,

gold becomes appealing because there is no counterparty. You're not relying on anyone else. It's just you and your gold. But then of course, in reality, it doesn't really work like that. There's also just the historical relationship of gold to various other assets during periods of market stress. When COVID broke out, it rallied. When Russia invaded Ukraine, it rallied.

So the belief that it is a safe haven becomes a reality and traders turn to it when markets run into trouble or geopolitical tensions run high. I should say that when you get a severe sell-off, gold does tend to get caught up on that in the short term because there's a dash for cash, hedge funds have margin calls to meet, gold is liquid, it's easy to sell.

But then after those kind of periods of turbulence, then you start to see it rise. So that's what you saw this month. And that's what you saw, for example, in the global financial crisis. Well, let's try to understand how this recent rally fits into historical trends. What does it tell us about...

investor sentiment at the moment? So the current rally has been really strong. You have to go fairly far back to find kind of parallels. You could argue after the global financial crisis in the years 2009, 2010, gold had a similar performance. And then further back than that, I mean, the best time ever for gold was the 1970s when you had stagflation actually across a lot of the West that decade.

Richard Nixon abandoned the gold standard and gold rose tenfold. So at the moment, there's some factors obviously moving in gold's favour. There's war in Europe. There's obviously geopolitical tensions across the Middle East. You have some people who believe that inflation is going to be structurally more elevated for the next couple of years than it's been for the last 30 years. And all of that then combined with this trade war, all that stands to benefit gold.

What do we know about who's buying gold? The most important driver of the rally has been the central banks. Central banks hold gold in their foreign exchange reserve alongside dollars, euros, yen, other assets. But basically the situation is rich countries that were part of the post-war gold standard, so the Bretton Woods system, have a lot of gold. The US has nearly $900 billion worth of gold.

Germany has nearly half that. Italy has a lot. Switzerland has a lot. Not so much the UK, unfortunately, because a lot of it was sold about 30 years ago by Gordon Brown famously for about a tenth of the price it is now. But that leaves other developing economies, central banks, relatively underweight. So China, for example, has less gold in its official reserves than Italy. So in the last 15 years, central banks have been

big buyers, China, India, Poland, the Czech Republic, they've all been adding a lot of gold. And that's actually sped up in particular since the invasion of Ukraine by Russia, because Russia's foreign exchange reserves held in euros, held in dollars were frozen from them. And that, I think, woke up a lot of central banks around the world to the fact that there

Their foreign exchange reserves, which were predominantly held in dollars and also in euros and pounds, were vulnerable to the long arm of European sanctions or US sanctions. But again, it's just you and your gold. If you are keeping your gold in a safe within your own territory, it can't be seized, it can't be taken away.

universally accepted and so it's a way to diversify your risk and to bring some of your foreign exchange reserves out of the kind of long arm of some of the Western countries. I'm just picturing this idea of people sitting in rooms full of gold now but are there practical issues with

holding gold given that, as you pointed out, one of the unusual things about it is it's a physical asset. So there's a number of ways to hold it. I mean, for most, the most practical way is probably through a gold-backed ETF. Basically, by sharing a fund that holds a big pile of gold...

It's easy to buy. It's easy to sell. One drawback is that there are fees with it because you're paying someone essentially for storing the gold. Also, if you're some sort of doomsday prepper type of buyer, which there are plenty of them in the gold market, you don't have direct custody over your gold. So if that's important to you, I always think, though, in a doomsday scenario, you're better off buying tinned food and guns because...

It's the sort of doomsday you're preparing for, clearly. Yeah, I don't know how useful really gold would be if everything goes wrong. You can also buy $50,000 half kilo bar from Costco or any other bullion dealer. Costco has become really popular.

People go gold shopping. Yeah, you can go gold shopping, but Costco charge about a 2% premium over the spot price. So that's not bad. But then there's practical issues like security and then crucially reselling because obviously you'll go to a bullion dealer, but they might only offer you a couple of percent below the spot price. So again, that's kind of a friction to buying and selling.

We heard from Warren Buffett a little bit earlier talking about his views on gold and the question of what utility it really has and how it rates as a store of value. Is there many people that share his view on gold and the question of utility?

I mean, I think he's right, basically. It's not that useful. A small amount is used in technology. It has ornamental value, so it's quite beautiful. It has its distinctive colour. It doesn't tarnish. It's very malleable, so it's good for jewellery. Looks great in a ring, yeah. It does, it does. But its value, you know, $3,500 an ounce is far in excess of its actual utility. What it does have going for it is scarcity,

It's quite rare in the Earth's crust. It's quite difficult to get out. It has obviously historical importance, the cultural salience, millennia of history as a store of value, as something that has been perceived to be valuable. And so I guess you could say in some senses, the use case is a bit like Bitcoin, where you don't have a counterparty, as I mentioned earlier. Bitcoin obviously also requires some effort to mine. But the difference is that

I mean, gold has a track record of rising during periods of market stress. It's not massively volatile. And it has strong cultural importance in parts of the world economy that are growing very quickly. So China and India and Pakistan. What about the risk of a gold bubble? What could disrupt this rally that we've seen that's pushed gold to record high after record high? The fact that it's nearly been a unbroken line upwards since early 2024,

Some people in the market think that a pause or a period of consolidation might be likely. Some of the things that could be bearish for the price, if you had major easing of the trade war, for example, any de-escalation in major conflicts, so in particular the war in Ukraine, that could lead to a sell-off if people perceived geopolitical tensions to be easing somewhat. But I think the thing that would do lasting damage, but it's really a tail risk, is the

if you had some of the large developed economy central banks, so the US, which has a lot of gold obviously, or Germany or Italy, if for whatever reason one of those countries decided to start selling their gold into the rally, for example, if they had a debt crisis or some other reason to do so, that would be extremely bearish for the price. And any news or hints towards that, I think, would be very damaging to the price.

And that was actually what drove gold's bear market through the 1990s right up to 2000. Everyone was selling their gold and the consensus was that gold is a relic and the smart thing to do is sell it and take dollars while you can. And that was the environment in which the UK sold its gold for such a low price. Central banks have been buying for the last 15 years. That's been the key driver of price. I think the only thing that will really halt and reverse gold would be if that trend stops.

Okay. Jack Ryan, our precious metals reporter, thank you very much. For more explanations like this from our team of 3,000 journalists and analysts around the world, go to Bloomberg.com slash explainers. I'm Stephen Carroll. This is Here's Why. I'll be back next week with more. Thanks for listening. There are presentations.

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