Gold: Unpacking the rally

0:00Patrick Coffey:Welcome to the Barclays Brief podcast. If you tuned in for episode one, welcome back. And if you're here for the first time, great to have you with us. The idea of this podcast is simple. Each week, we bring you differentiated insights from our experts across both Barclays Research and our global markets division. So think about one theme, one specialist, 10 minutes of clarity. I'm Patrick Coffey from Barclays Research. And in the last few weeks, colleagues across the bank have been fielding lots of incoming questions from clients on gold. So let's find out what on earth is going on with the price of gold.

0:32Patrick Coffey:And particularly, the question I want to learn about is, is the surge in the price of gold signaling an increasing distrust in the established fiscal and monetary order? I'm thrilled to be joined by my colleague, RJ Rajadash, our chair of Barclays Research. RJ, thanks for being here today. Hey, Patrick, good to be here. You know, decades ago, as a little kid in Mumbai, I remember my grandfather telling me to always buy only two things. One was property. The other was gold. Let's just say grandpa would be a happy man today. I'm sure he would be. And I'm very happy that you're here, RJ. Very excited to get into it.

1:09Patrick Coffey:It's the 13th of October. And as we're speaking, the price of gold is outperforming markets once again. So there's lots to discuss. But let's just start with the basics. I thought gold was meant to be an inflation hedge. And I thought gold was meant to go up lots when other things were going down. But why are investors buying gold now? It's a great question. historically as a hedge, as a sign that they don't believe that the people in charge will do the right thing, that when things go to part, when currencies keep getting debased, gold will be the one thing that holds its value. But I think this is what you're getting at, Patrick.

1:44There's no question that the buyer base has widened a lot from just the fringe element in recent decades.

1:51Patrick Coffey:Yeah, it's certainly widened. The price of gold has gone up massively. You know, it's just smashed through$4 ,000 an ounce. It's up over 20 % in two months, over 60 % in the past year, and over 120 % in the last three years. So what's driving that rally? Demand, supply, and then yes, there's fear. But look, let's do the demand side first. Central bank demand for gold has jumped sharply from 2022, not coincidentally, after the West froze Russian FX reserves. The share of gold in global FX reserves is now more than the share held in US treasuries. But you You know, the weird part, Patrick, even as the price of gold has gone up 150 % in five years, the amount of new gold mined has only risen about 10%.

2:34Rising production costs, fewer new discoveries, geopolitical headaches, all of these are reasons. And then, of course, in the last year, retail investors are getting involved in flows into gold ETFs have exploded in recent months. And that, I think, is the fear factor you mentioned finally showing up.

2:50Patrick Coffey:Exactly. Now, I'm interested in supply, I'm interested in demand, but I'm particularly interested in fear. I was reading your research note last week, and you argued that gold's rise may be signaling unease with the fiscal and monetary order. Can you just lift the curtain on that for our listeners? Right. So I'm going to pick four economies, large ones, developed economies, and walk you through them. The US, the UK, France, and Japan all have large debt loads, very large. Their fiscal profiles are still worsening. Inflation in most is still not a target. But most importantly, there's virtually no political appetite for fiscal consolidation.

3:26In Japan, the new LDP leader is talking about new stimulus. France is on its sixth prime minister in less than two years. the country still cannot pass a budget. And in the United Kingdom, the Labour government

3:36Patrick Coffey:has struggled even with a large parliamentary majority to make even small cuts in spending. The US has benefited a little bit from tariff revenue, is true, but the longer term US fiscal profile still shows debt to GDP worsening. And of course, on the monetary side, fiat currencies have taken a real beating from inflation in the last few years. All of these things, I think, are showing up in gold. Okay, so what you're effectively saying is increasing the gold price, which has been significant, is a signal to policymakers about that concern around the fiscal profiles in those large countries and elsewhere.

4:11Patrick Coffey:But let me just push back on that for a moment, RJ. The gold price is simply a function of supply and demand, as you said, and the rise in the gold price is simply a catch up to its fair value. Our FX strategists have shown that in their gold model in a note they published just two weeks ago. So where am I wrong in that analysis? Where you're wrong, Patrick, is that two things can be right at the same time. So yes, gold has benefited from post-COVID inflation. There is an element of catch-up. But my God, this is now a five-year bull market. It is not six months, not 12 months. Gold's been going up for the last five years.

4:44And it is definitely signaling an unease about the global financial order as well. It's not just gold, it's silver too. Silver's up 75 % this year. Yes, there's a short squeeze. All of those things matter from time to time. But the sustained nature of the rally in precious metals, if policymakers don't see this as a problem, I think it's because they're choosing not to.

5:04Patrick Coffey:Okay, help me understand that a bit more. You mentioned this isn't just about the gold rush, and obviously silver surged as well, but Bitcoin's rallied. So is this just asset rotation, or is it a deeper signal of distrust in the fiat regimes? It's the latter. It's a deeper signal of distrust in fiat regimes, because usually, you know, when you have asset rotation? It's something you mentioned right at the start of this conversation. Gold and silver do well usually when equities are doing badly. So it's not like people are moving out of equities into gold and silver. That's not what is happening.

5:35I also, Patrick, quickly want to distinguish between crypto and hard metals. On Friday, when President Trump threatened 100 % tariffs on China, equities had their worst day since April. You know what Bitcoin did? It had a flash crash. Meanwhile, gold and silver kept going right on up. So yes, I think there is a distress in fiat regimes, but precious metals for now seem the one consistent hedge against currency debasement.

6:00Patrick Coffey:Understood. So RJ, you mentioned that post-COVID we've seen this huge increase in gold. The biggest drivers of that price have been inflation and central bank buying. So how should we think about gold versus equities right now? You shouldn't. You know, we think of equities among along normal metrics price to equity multiples earnings power etc look let me flip the question Patrick gold struggled between 2011 to 2018 I don't recall anyone coming up to me and saying oh look equities are so rich against gold that's not how it works so now we don't think equities are cheap mind you but big tech in particular has so much earnings power that I would worry if I see a large pullback on the earnings side coming I would not conflate these to asset classes at all right now.

6:46Patrick Coffey:Okay. And Ajay, you obviously listened to our first episode with Ronnie Wexler talking about his bullish perspective on US markets. And we've got this surging gold price. Can the two coexist at the same time? They can. One asset class is much smaller than the other. Let's not forget that. But I hear where you're going. It is true that gold and silver both look extremely overbought on technical indicators right now. I mean, you don't go parabolic in an asset class without some pullback from time to time. We might well get one. But Patrick, that's a pause. Until governments get their house in order, and that really doesn't seem likely in the forcible future, there's going to be a role for gold in portfolios.

7:25Patrick Coffey:RJ, thank you so much for joining me today. Based on what I've just heard, here's a few things I'm walking away with. Firstly, gold is a hedge. That's pretty well understood. But today, it's different. The gold price is rallying despite healthy financial markets. Secondly, the recent increase in the gold price could be signaling an increasing distrust in the established fiscal and monetary order. And finally, precious metals like gold could play an important role in investors' portfolios for years to come. Thanks so much for listening to this second episode of the Barclays Brief Podcast. Do subscribe wherever you're listening.

7:58Patrick Coffey:And if you're a Barclays client, you can explore more differentiated views, data, and analysis on Barclays Live. And while you're there, check out RJ's latest piece called What is Gold Signaling?