Capital Markets Update #24

Since January 2022, the price of gold has jumped from $1,830 per troy ounce to around $4,100 per troy ounce today.  Within this record run, gold touched an all-time high at around $5,200 per troy ounce in March 2026.  This spectacular, somewhat secular move in what has historically been a relatively stable, a-cyclical defense trade in gold can be attributed to a handful of both transient and durable factors.  First, and most relevant to the theme of this week’s piece, is the adoption of gold as a source of diversification away from US dollar denominated assets in foreign reserve holdings.  Second would be the amplification of these fundamentals by speculative retail and factorial momentum buying.  Not to bury the lead, but it’s likely that the latter is the culprit as we try and find reason behind the recent meteoric move in gold prices. However, it’s the former we care most about and whether or not the last five years’ worth of US market manipulation will have lasting ramifications on our ability to continue to finance our structural annual budget deficit. 

Over the last decade, no country has added more gold to its coffers than China. One might think of gold accumulation in strategic reserve as a more recent phenomenon, but China has been buying gold as a means of dollar diversification since 2016.  2016 was a rough year for China; seemingly an experience the country goes through every 5 years. At year end 2015, the Chinese government attempted to devalue its currency in order to increase exports and, instead, started a firesale in the yuan by accident.  By year-end 2016, China had purchased over $300B of its own currency in order to support prices (WSJ), the Chinese CSI 300 index sold off 45% (performance from 4/15 – 3/16) and savings accounts, in local currency, were decimated.  Throughout 2016, approximately $1.0T in Chinese capital fled the country, with the majority of that capital taking up new residence in the glorious US of A (WSJ).  Publicly available foreign reserve data shows that in Q1 2016, China literally purchased 600 tons of gold over the three month period January - March.   It financed that purchase with an approximately $200B sale of its record US Treasury hoard.  Throughout the following decade, China has strategically sold Treasuries, decreasing its holdings from $1.2T in 2016 to $652B today and used the proceeds to increase its stockpile of gold from approximately 1,000 tons to approximately 2,300 tons over the same period. And to China’s credit, gold price has run 275%, from about $1,100 per troy ounce in January 2016 to about $4,100 today.  

The diversification trade away from the dollars into gold received a second catalyst in Q1 2022 when the then US administration elected to freeze all Russian holdings of dollar-denominated assets in foreign banks.  According to the US Treasury, roughly $280B of Russian assets have been frozen and confiscated by a network of US-allied global banks since 2022.  Further sanctions included banning general Russian access to the SWIFT transaction network, which means the US would not accept any swap or liquidity request which included a sanctioned entity as a counterparty.  Basically, if you wanted to use dollars to buy oil, or sell oil to a buyer attempting to pay in dollars, that’s not allowed.  For reference, and to quantify the global reach of the SWIFT network, roughly 50% of all international payments are settled in dollars (Fed).  In many ways, think of that as global trade.  Furthermore, the preponderance of currency exchange is dollar denominated, with roughly 89% of all swaps and exchange transactions underwritten in dollars (Fed).  The US Dollar accounts for approximately 59% of total foreign reserves followed by the Euro which accounts for about 20%.  The point being, the US Government’s ability to both limit liquidity and directly reach into an adversary’s pocket is actually quite shocking and, accordingly, unnerving to foreign governments, both allies and adversaries.   China immediately bought 300 tons of gold in Q1 2022, Russia had been stockpiling gold for a while, increasing its reserves from about 1,600 tons in 2016 to 2,300 tons in 2020 and has since maintained its reserves despite participating actively in the gold market to float its economy as inflation devalued its Ruble currency.   India has sold about $50B of treasuries since 2022 (Treasury) and used the proceeds to purchase approximately 120 tons of gold (Trading Economics).  Brazil has bought 100 tons (Trading Economics) in the last five years, while selling approximately $60B in US Treasuries since 2024 (Treasury).     

So, while the BRIC countries have clearly shown both willingness and capacity to diversify away from US dollar denominated reserve assets into gold, we must say the data is inconclusive as to whether this represents a more widely accepted trend.  Outside of the BRICs, Poland (315 tons) and Türkiye (250 tons) represent the only other meaningful participants in the international gold market since 2020 (VirtualCapitalist).  However, since January 2020, Poland has bought over $22B in US Treasuries (US Gov data) while Turkiye increased its Treasury holdings from basically nothing to about $20B by YE 2025, before selling $14B of securities to help prop up the Turkish Lyra in Q1 2026 (Turkiye Today).  Thus, one can’t necessarily say with confidence the Polish and Turkish asset management moves represent an anti-American diversification play.  Perhaps they saw the run up in gold as an advantageous buying opportunity and wanted to add some performance to their asset base?  Who knows, but those moves feel different than the broader BRIC initiative.  French, German, Japanese and British holdings of gold are all flat or down.

In summary, we think gold will likely remain an interesting investment asset for a long time to come.  While some of the air has thankfully escaped the bubble, there’s little doubt a real slice of fundamental gold demand has emerged since 2022 from BRIC nations as they diversify their reserve holdings away from the dollar.  The question will be whether or not these nations are willing to withstand the kind of volatility which can emerge in a commodity with significant exposure to momentum.  For instance, despite rampant central bank buying, gold price was basically flat from July 2020 to January 2024, before jumping 150% throughout the ensuing 24 months, only to then plummet 20% in 2026.  

In the end, the US dollar price today remains incredibly strong by all historical standards, while recent Treasury auctions have defied expectations by performing remarkably well.  There’s no lack of demand for US dollar denominated assets in the market place, neither public nor private.  That said, we would be ignorant to dismiss this diversification trend amongst the BRIC countries.  We will continue to watch US treasury auctions and pay close attention to the depth of the Indirect buyer bid (that’s the foreign entity buyer bid – usually foreign governments).  Any material change will likely take years to play out, but we’re still young (ish), so we’ll stay appraised so that you may stay informed.