Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? (2nd of 3 Part Series)

 

In the course of history various commodities have been employed as media of exchange. A long evolution eliminated the greater part of these commodities from the monetary function. Only two, the precious metals gold and silver, remained. In the second part of the 19th century, more and more governments deliberately turned toward the demonetization of silver. In all these cases what is employed as money is a commodity which is used also for nonmonetary purposes. Under the gold standard, gold is money and money is gold. It is immaterial whether or not the laws assign legal tender quality only to gold coins minted by the government—Ludwig von Mises 

This post is the second in a three-part series 

In this Issue 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order?

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise

II. A Brief Recap on Gold’s Role as Money

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard)

IV. The Age of Fiat Money and the Explosion of Debt

V. Central Banks: The Marginal Price Setters of Gold

VI. Is a U.S. Gold Audit Fueling Record Prices? 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? 

The second part of our series examines the foundation of the global economy—the 54-year-old U.S. dollar standard—and its deep connection to gold’s historic rally. 

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise 

Global central banks have played a pivotal role in driving gold’s record-breaking rise, reflecting deeper tensions in the global financial system. 

Since the Great Financial Crisis (GFC) of 2008, central banks—predominantly those in emerging markets—have significantly increased their gold reserves, pushing levels back to those last seen in 1975, a period just after the U.S. government severed the dollar’s link to gold on August 15, 1971, in what became known as the Nixon Shock. 

This milestone reminds us that the U.S. dollar standard, backed by the Federal Reserve, will mark its 54th anniversary by August 2025.

Figure 1

The accumulation of gold by central banks, particularly in the BRICS nations, reflects a strategic move to diversify away from dollar-dominated reserves, a trend that has intensified amid trade wars, sanctions, and the weaponization of finance, as seen in the freezing of Russian assets following the 2022 Ukraine invasion.  (Figure 1, upper window)

The fact that emerging markets, particularly members of the BRICS bloc, have led this accumulation—India, China, and war-weary Russia have notably increased their gold reserves, though they still lag behind advanced economies—reveals a growing fracture in the relationship between emerging and advanced economies.  (Figure 1, lower graph and Figure 2, upper image)  

Figure 2

Additionally, their significant underweighting in gold reserves suggests that BRIC and other emerging market central banks may be in the early stages of a structural shift. If their goal is to reduce reliance on the U.S. dollar and close the gap with advanced economies, the pace and scale of their gold accumulation could accelerate (Figure 2, lower chart)

Figure 3

As evidence, China’s central bank, the People’s Bank of China (PBOC), continued its gold stockpiling for a fourth consecutive month in February 2025. (Figure 3, upper diagram)

Furthermore, last February, the Chinese government encouraged domestic insurance companies to invest in gold, signaling a broader commitment to gold as a financial hedge. 

This divergence underscores a deepening skepticism toward the U.S.-led financial system, as emerging markets seek to hedge against geopolitical and economic uncertainties by strengthening their gold reserves 

In essence, gold’s record-breaking rise may signal mounting fissures in today’s fiat money system, fissures that are being expressed through escalating geopolitical and geoeconomic stress. 

II. A Brief Recap on Gold’s Role as Money 

To understand gold’s evolving role, a brief historical summary is necessary. 

Alongside silver, gold has spontaneously emerged and functioned as money for thousands of years. Its finest moment as a monetary standard came during the classical gold standard (1815–1914), a decentralized, laissez-faire regime in Europe that facilitated global trade and economic stability. 

As the great dean of the Austrian School of Economics, Murray Rothbard, explained, "It must be emphasized that gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium. Above all, the supply and provision of gold was subject only to market forces, and not to the arbitrary printing press of the government." (Rothbard, 1963) 

However, this system was not destined to endure. The rise of the welfare and warfare state, supported by the emergence of central banks, led to the abandonment of the classical gold standard. 

As Mises Institute’s Ryan McMaken elaborated, "This system was fundamentally a system that relied on states to regulate matters and make monetary standards uniform. While attempting to create an efficient monetary system for the market economy, the free-market liberals ended up calling on the state to ensure the system facilitated market exchange. As a result, Flandreau concludes: ‘[T]he emergence of the Gold Standard really paved the way for the nationalization of money. This may explain why the Gold Standard was, with respect to the history of western capitalism, such a brief experiment, bound soon to give way to managed currency.’" (McMaken, March 2025) 

The uniformity, homogeneity, and growing dependency on the state in managing monetary affairs ultimately contributed to the classical gold standard’s demise. 

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard) 

World War I forced governments to abandon gold convertibility, leading to the adoption of the Gold Exchange Standard—where only a select few currencies, such as the British pound (until 1931) and the U.S. dollar (until 1933), remained convertible into gold. 

Later, the Bretton Woods System attempted to reinstate a form of gold backing by pegging global currencies to the U.S. dollar, which in turn was tied to gold at $35 per ounce. 

However, rising U.S. inflation, fueled by fiscal spending on the Vietnam War and social welfare programs, combined with the Triffin dilemma, led to a widening Balance of Payments (BoP) deficit. Foreign-held U.S. dollars exceeded U.S. gold reserves, threatening the system’s stability. 

As economic historian Michael Bordo explained: "Robert Triffin (1960) captured the problems in his famous dilemma. Because the Bretton Woods parities, which were declared in the 1940s, had undervalued the price of gold, gold production would be insufficient to provide the resources to finance the growth of global trade. The shortfall would be met by capital outflows from the US, manifest in its balance of payments deficit. Triffin posited that as outstanding US dollar liabilities mounted, they would increase the likelihood of a classic bank run when the rest of the world’s monetary authorities would convert their dollar holdings into gold (Garber 1993). According to Triffin, when the tipping point occurred, the US monetary authorities would tighten monetary policy, leading to global deflationary pressure." (Bordo, 2017)

Bretton Woods required a permanently loose monetary policy, which ultimately led to a mismatch between U.S. gold reserves and foreign held dollar liabilities. 

To prevent a run on U.S. gold reserves, President Richard Nixon formally ended the dollar’s convertibility into gold on August 15, 1971, ushering in a fiat money system based on floating exchange rates anchored to the U.S. dollar. 

IV. The Age of Fiat Money and the Explosion of Debt 

With the shackles of gold removed, central banks gained full control over monetary policy, leading to unprecedented levels of inflation and political spending. Governments expanded their fiscal policies to fund not only the Welfare and Warfare State, but also the Administrative/Bureaucratic State, Surveillance State, National Security State, Deep State, Wall Street Crony State, and more. 

The most obvious consequence of this system has been the historic explosion of global debt. The OECD has warned that government and bond market debt levels are at record highs, posing a serious threat to economic stability. (Figure 3, lower chart) 

V. Central Banks: The Marginal Price Setters of Gold 

Ironically, in this 54-year-old fiat system, so far, it is politically driven, non-profit central banks—rather than market forces—that have become the marginal price setters for gold. 

Unlike traditional investors, central banks DON’T buy gold for profit, but for political and economic security reasons. 

The World Gold Council’s 2024 survey provides insight into why central banks continue to accumulate gold: "The survey also highlights the top reasons for central banks to hold gold, among which safety seems to be a primary motivation. Respondents indicated that its role as a long-term store of value/inflation hedge, performance during times of crisis, effectiveness as a portfolio diversifier, and lack of default risk remain key to gold’s allure." (WGC, 2024) 

This strategic accumulation reflects a broader trend of central banks seeking to insulate their economies from the vulnerabilities of the fiat system, particularly in an era of heightened geopolitical risks and dollar weaponization.

Figure 4 

The Bangko Sentral ng Pilipinas (BSP) has historically shared this view. (Figure 4, upper graph) 

In a 2008 London Bullion Management Association (LBMA) paper, a BSP representative outlined gold’s importance in Philippine foreign reserves—a stance that remains reflected in BSP infographics today. 

Alas, in 2024, following criticism for being the largest central bank gold seller, BSP reversed its stance. Once describing gold reserves as "insurance and safety," it now dismisses gold as a "dead asset"—stating that: "Gold prices can be volatile, earns little interest, and has storage costs, so central banks don’t want to hold too much." 

This shift in narrative conveniently justified BSP’s recent gold liquidations. 

Yet, as previously noted, history suggests that BSP gold sales often precede peso devaluations—a warning sign for the Philippine currency. (Figure 4, lower window)

VI. Is the Propose U.S. Gold Audit Help Fueling Record Prices? 

Finally, could the Trump-Musk push to audit U.S. gold reserves at Fort Knox be another factor behind gold’s rally? 

There has long been speculation that U.S. Treasury gold reserves, potentially including gold stored for foreign nations, have been leased out to suppress prices.

Figure 5

Notably, Comex gold and silver holdings have spiked since these audit discussions began. Gold lease rates rocketed to the highest level in decades last January. (Figure 5, top and bottom charts) 

With geopolitical uncertainty rising, central bank gold buying accelerating, and doubts growing over fiat stability, gold’s record-breaking ascent may be far from over. 

Yet, it’s important to remember that no trend goes in a straight line.

___

References 

Murray N. Rothbard, 1. Phase I: The Classical Gold Standard, 1815-1914, What Has Government Done to Our Money? Mises.org 

Ryan McMaken, The Rise of the State and the End of Private Money March 25,2025, Mises.org 

Michael Bordo The operation and demise of the Bretton Woods system: 1958 to 1971 CEPR, Vox EU, April 23, 2017 cepr.org 

World Gold Council, Gold Demand Trends Q2 2024, July 30,2024, gold.org

Charts of the Week: Negative Bond Yield Spreads as Global yields fall to record, China’s Shibor rates plunge to 2009 lows as Hong Kong’s HIBOR rates spike!

Charts of the Week: Negative Bond Yield Spreads as Global yields fall to record, China’s Shibor rates plunge to 2009 lows as Hong Kong’s HIBOR rates spike!

As negative-yielding sovereigns spread with the entire Swiss curve in the negative, Germany’s 30-year yield remains the only positive.

Global bond yields hit record low prior to the payroll reports.

German bunds fell below the ECB’s deposit rates for the first time ever!

Hong Kong’s 1-week interbank lending rate (HIBOR) raced to 2008 levels to highlight symptoms of liquidity squeeze!

In the meantime, China’s overnight interbank lending rate (SHIBOR) falls to 2009 lows last Thursday, to signify panic hoarding by banks.

Finally, when the public refuses to borrow, just forced them to. Nigeria’s central bank orders banks to lend money.  

You can lead the horse to the water, but you can’t make it drink.

Unfortunately, that’s the only thing central banks know of.

What’s Bugging the IMF, OECD, UNCTAD, WTO and BIS?

During the past week or two, several multilateral institutions have been voicing out concerns about macro issues. Question is why?

First, the IMF raised the risks of rising protectionism

From the Telegraph (September 27)

Urgent action is needed to reverse a slowdown in trade and stop low inflation from triggering a downward spiral of weak growth, job cuts and higher debt, the International Monetary Fund has warned.

A global lurch towards protectionism and the sluggish recovery had driven a "remarkable" slowdown in trade since 2012, according to analysis by the Fund.

The IMF warned that a further move away from trade liberalisation was likely to "hold back international trade in goods", harm economic development and prolong the global slowdown.

The IMF further “warned that trade barriers such as anti-dumping duties had increased since 2008 as it urged countries to "resist all forms of protectionism"”. "Even though the contribution of trade costs to the trade slowdown has been limited relative to weak economic activity so far, the dearth of new global policy initiatives to reduce these costs, along with the gradual rise of non-tariff barriers since the global financial crisis, could pose further risks to trade," it said.

Though the IMF mentioned of the need to “reverse a slowdown in trade and stop low inflation from triggering a downward spiral of weak growth, job cuts and higher debt”, they didn’t say what has caused these. They also didn’t say what has sparked a rise in protectionism.

They didn’t say that most of the present problems have emanated from the bold experiments undertaken by central banks.

As reminder, here is John Maynard Keynes on how to destroy society (PBS).

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency.By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month,all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right.There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. 

The essence of inflationism is ‘protectionism’. It is a policy that creates winners among a few, and losers in the general. Inflationism represents the redistribution of resources through monetary means or through currency debasement. Inflationism works to the benefit of, or protects the interests of the governments and their cronies. Benefits from political redistribution through inflationism come at the expense of the people through the loss of purchasing power which spills over to the social fabric. Because inflationism is a time consuming process, the gangrene spreads unevenly to different sectors of society. In short, inflationism incites and fosters societal frictions that eventually lead to decadence.

Because the public have little idea of the ramification of inflationist policies, they have been made to believe that external factors have been the culprit for most of their afflictions. And to contain such suffering, mostly through the politics of nationalism, demand for protectionism rises. From here, barriers to trade (direct through tariffs and indirect through non tariffs) capital movements, as well as, various people controls have been erected.

Even the mainstream recognizes this.

Chief Economist of the OECD, formerly of the BIS, Mr William White, recently wrote an opinion column at the Financial Times (September 25)

Central banks have been engaged in unprecedented monetary experimentation. Unlike scientists developing drugs, fear of the unknown has had no moderating influence on their activities. That in itself is alarming. Nor is it possible to reverse recent policies. Now governments must accept responsibility for resolving an incipient global solvency crisis.

Bottom of Form

The monetary stimulus provided repeatedly over the past eight years has failed to produce the expected expansion of aggregate demand. Debt levels have risen, especially in emerging market economies, constraining expectations of future spending and current capital expenditures. Consumers have had to save more, not less, to ensure adequate income in retirement.

At the same time, easy money threatens two sets of undesirable side effects.

First, current policies foster financial instability. By squeezing credit and term spreads, the business models of banks, insurance companies and pension funds are put at risk, as is their lending. The functioning of financial markets has also changed, with market “anomalies” indicating hidden structural shifts, and many asset prices bid up to dangerously high levels.

Second, current policies threaten future growth. Resources misallocated before the crisis have been locked in through zombie banks supporting zombie companies. And with neither financial institutions nor financial markets functioning properly, real misallocations since the crisis have been further encouraged.

Perhaps we need look no further for the cause of the alarming slowdown in global growth than the insidious effects of easy-money policies. Two vicious circles are at work with a wounded financial system contributing to both. On the demand side, accumulating debt creates headwinds, leading to more monetary expansion and more debt.

This explanation contrasts sharply with the hypothesis of a “savings glut”: little more than a tautology for slow demand growth. On the supply side, misallocations slow growth which again leads to monetary easing, more misallocation and still less growth. This explanation seems far more convincing than “secular stagnation” in an era of extraordinary technological advances.

Note of what Keynes wrote, “all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered”

Again Mr White channeling Keynes:

“Nor is it possible to reverse recent policies. Now governments must accept responsibility for resolving an incipient global solvency crisis.”

“The functioning of financial markets has also changed, with market “anomalies” indicating hidden structural shifts, and many asset prices bid up to dangerously high levels.

“And with neither financial institutions nor financial markets functioning properly, real misallocations since the crisis have been further encouraged.”

Of course it hasn’t just been the IMF and the OECD, the WTO presently frets over the material fall in global trade. From Bloomberg (September 27)

Global trade will expand at the slowest pace since the financial crisis this year, the World Trade Organization said, as weakness in key regions and rising protectionism take a toll.

The Geneva-based organization forecasts that trade will expand 1.7 percent in 2016, down from an April estimate of 2.8 percent. It predicts real GDP growth of 2.2 percent, marking the weakest performance since 2009.

Worryingly, the WTO sees a risk that trade won’t pick up next year, cutting its 2017 projection to a range of 1.8 percent to 3.1 percent, down from 3.6 percent previously. It said with increasing wariness of globalization, governments and authorities must do more to support open trading that’s more inclusive.

“The dramatic slowing of trade growth is serious and should serve as a wake-up call,” WTO Director General Roberto Azevedo said in a statement Tuesday. “This is a moment to heed the lessons of history and re-commit to openness in trade, which can help to spur economic growth.”

Add to the chorus of alarmism has been the central bank of central banks, the Bank for International Settlements which sees several ominous risks from the current environment

One, the surge in the use of derivatives, as well as demand for US dollars and US dollar based assets as unforeseen repercussions from the flight from zero. From Bloomberg (September 18)

Demand for currency hedging is increasing, indirectly spurred by a handful of central banks whose unprecedented policies are crushing interest rates in some the biggest economies, according to the Bank for International Settlements.

As quantitative easing pushes bond investors to look abroad for higher yields and companies flee to foreign markets to borrow more cheaply, they need to hedge their currency exposure. It’s yet another unintended consequence of stimulus that has driven yields below zero on more than $8.3 trillion of sovereign debt, undermined banks’ lending income and raised costs for pension funds that have pledged fixed returns.

“In recent years, the term and credit-spread compression on the back of unconventional monetary policies in major jurisdictions has boosted these cross-currency investment and funding flows,’’ BIS researchers including Claudio Borio, head of the monetary and economic department, said in a quarterly report released Sunday. “In particular, Japanese life insurers’ search for yield overseas has led them to increase FX-hedged investments in U.S. dollar-denominated bonds.’’

Much of the hedging is done using swaps, which allow an investor to borrow one currency from a counterparty while simultaneously lending a second currency to another. A separate BIS triennial survey by the institution showed the daily turnover of swaps climbed 6 percent to $2.4 trillion in April from three years earlier.

Institutional investors use swaps to “strategically hedge foreign-currency investments,” as QE purchases by central banks from Japan to London reduce the availability of securities in their home markets, the BIS said.

“Banks, pension funds and life insurance companies from those economies with low or negative rates have sought to pick up yield by purchasing dollar assets,” said Hyun Song Shin, economic adviser and head of research at the Basel, Switzerland-based institution. “The search for yield has taken on the character of a “flight from zero.”

Negative interest rates outside the U.S. have caused a surge in demand for dollars and dollar assets, pushing up the cost to get into and out of the greenback at the same exchange rate to levels rarely seen in the past. The appetite for dollar assets also presents an opportunity for investors with greenbacks to spare, with Pacific Investment Management Co.’s largest international bond fund and China among the ones tapping into the phenomenon.

Another source of demand for currency hedges is banks, which may fund themselves through swaps in order to hedge their balance-sheet mismatches, the BIS researchers said. Since 2015, Japanese banks have relied more on foreign-exchange swaps for dollar funding due to the lower availability of wholesale funds in the U.S. currency, it added.

As one would note, unintended consequences means a buildup of mismatches or asset liability mismatches…all these courtesy of “all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered”

Two, the BIS also warned on amplified risks of financial instability

From the CNBC (September 18)

Financial markets have coped well with Brexit and other potentially disruptive political developments recently but asset prices may be running too high and the potential risks to market stability are growing, a report warned on Sunday.

In its Quarterly Review, the usually guarded Bank for International Settlements didn't explicitly say that stock and bond markets are bubbles waiting to burst. But valuations are high, especially given that the foundations they are built on may not be so solid.

BIS reports aren't known for their stark language and blunt warnings, but they offer an insight into what's occupying the thoughts of the world's most powerful and important central bankers.

"There has been a distinctly mixed feel to the recent rally - more stick than carrot, more push than pull, more frustration than joy. This explains the nagging question of whether market prices fully reflect the risks ahead," said Claudio Borio, Head of the BIS Monetary and Economic Department.

Again Keynes: “the process of wealth-getting degenerates into a gamble and a lottery.

From the above report: asset prices may be running too high and the potential risks to market stability are growing

As one can see, wisdom written decades ago has been foreshadowing present events.

Three, the BIS also predicted a coming crisis in China. From Reuters (September 18)

Excessive credit growth in China is signaling an increasing risk of a banking crisis in the next three years, a report from the Bank for International Settlements (BIS) says.

An early warning of financial overheating - the credit-to-GDP gap - hit 30.1 in China in the first quarter of this year, the financial watchdog said in a review of international banking and financial markets published on Sunday.

Any level above 10 signals a crisis "occurs in any of the three years ahead," the BIS said. China's indicator is way above the second highest level of 12.1 for Canada and the highest of the countries assessed by the BIS.

Debt has played a key role in shoring up China's economic growth following the global financial crisis. Outstanding debt reached 255 percent of GDP in 2015, fueled in large part by a surge in corporate borrowing, up from 220 percent just two years earlier.

Well it is more than just the BIS. And it has been more than just about China, global trade and the global economy.

The United Nations Conference on Trade and Development (UNCTAD) has likewise sounded the alarm bells on rocketing debt levels of emerging markets which they see as potential triggers to a crisis.

From the Executive Intelligence Review (September 24)

Choosing to focus on one aspect of the global $1.5 quadrillion speculative bubble, which is bankrupt in its entirety, the United Nations Conference on Trade and Development (UNCTAD) issued its 2016 annual report warning that some $25 trillion in emerging market debt is facing imminent default. That conclusion, although partial, is certainly true.

The UNCTAD report notes that there was a huge influx of capital to developing markets after the 2008 crisis, because quantitative easing and other cheap credit policies in the developed sector created a massive carry trade in search of making a killing abroad. But now,

"alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out,"

the report says—a euphemism for a global collapse. Much of this emerging debt may soon become non-performing, they warn:

"If the global economy were to slow down more sharply, a significant share of developing-country debt incurred since 2008 could become unpayable and exert considerable pressure on the financial system."

UNCTAD warns of impending capital flight, devaluations, and collapsing asset prices. Last year, capital outflows from emerging markets reached $656 billion, and in the first quarter of 2016 they were already at another $185 billion.

Most people think that whatever problems that exists today will either have little effect on them, or that they will have sufficient time to get out before the avalanche. Some even think of perpetual free lunches from central banks (only positive consequences from unbridled money creation).

And be reminded too that the consequences of inflationism will not just appear on the financial markets, they will have real effects on the political economy.

Like Keynes, the great Austrian economist, author and journalist Henry Hazlitt, wrote to tell us of more of the political effects from inflationism (Economics in One Lesson p 157)

Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.

Drive men towards desperate remedies...protectionism via fascism, communism and totalitarian controls. 

Rings a bell?