The world’s central banks think about gold as the risk-free form of money, but this is not the view of financial markets at the moment.

Central banks have been on a gold buying binge over the last three years, with 2022 the highest level of buying on record, according to the World Gold Council.¹ Central bankers are becoming more and more motivated by issues such as counterparty risk and the safest place to keep reserves, in my view, and some central banks see gold a safer bet than US dollars or US Treasuries.

Saudi Arabia, China and Japan have reduced their holdings of Treasuries recently, though China and Japan remain the largest foreign buyers of Treasuries.² The Biden administration’s freezing of Russian central bank assets held in the US in response to the invasion of Ukraine made some creditor nations wary about being overly dependent on the dollar. They shifted to the true risk-free currency – gold.

I think it’s interesting that financial markets are obsessed with the language of central bankers on monetary policy — one word in a US Federal Reserve (Fed) statement can send the market charging from one direction to the other. Yet the obvious behaviour of central banks pertaining to their reserve base is ignored.

Markets should be paying more attention because gold is due for a breakout, in my opinion. Part of the problem is that the market only thinks about gold priced in dollars. However, gold has reached all-time highs recently priced in Australian dollars, Sterling, yen, yuan and rupees.

Gold went on a decent run between 2009-2011 in all currencies due to the obviously debasing behaviour of the central banks. It had strong periods of performance in 2020 and 2022 and again in May. It’s trading below $2,100/oz, and until it gets through $2,200 the markets aren’t interested.

What will trigger a move up in the dollar gold price? Anything that makes forward dollars look less attractive. The most obvious would be a topping out in Fed rate hikes or additional credit events — which I would say is unquestionably going to happen. The gold price tends to move inversely to real interest rates. It’s my view that with a dovish catalyst of any scale we will have a breakout in the price, and financial markets will pay attention to gold again. The media and momentum-chasing investment vehicles will follow. And where gold goes, silver will follow.

This will have implications for de-dollarisation, which will become an important narrative for global financial markets, in my view. More and more international trade is being settled with currencies other than the dollar – oil for yuan, for example. There has been a real shift in language about alternatives to the dollar, particularly in the countries known as BRICS (Brazil, Russia, India, China, South Africa).

For now, the relationship between the dollar and gold is intact, but there been a kind of war between them over risk-free status for the last 50 years.

A breakout in the dollar gold price would change that. My view is that gold is the truest risk-free currency because it’s not printed by a government. Just ask a central banker.