Founders Perspective
Founders Perspective | Another Case for Gold
John Merrill, October 2, 2024
Exactly six years ago, the title of my Perspective was A New World Order (October 2018). The main message of that piece was that the post-WWII world order was breaking apart. The rules formerly agreed for international trade, investment, and security were being undermined by China.
Since then, things have only gotten worse. Under President Xi Jinping, China has turned away from free market capitalism and rebuilt a Mao Zedong style of absolute communist rule. Along the way he has:
Purged all opponents to his absolute rule.
Reneged on the treaty with Great Britain for maintaining independent governance within Hong Kong through 2047.
Dismissed the World Court decision that held against their claim to almost all the South China Sea.
Made clear that China will take over Taiwan – either peaceably or by force – while Xi is in power.
China and Russia declared a “no limits” partnership in February 2022 (days before Putin invaded Ukraine).
National champions like Alibaba and Tencent were forced to accept communist board oversight to provide central party control.
Xi Jinping has focused on self-sufficiency and a large-scale military buildup. He has subsidized favored industries to build monopoly positions.
Many of the Chinese people who recognize this backsliding or feel threatened by the authoritarian rule are trying to leave the country. So far in 2024 over 24,000 Chinese have been apprehended crossing our border illegally.
China, Russia and other authoritarian countries are creating an alternate system based upon totalitarian government rule. They are determined to undermine Western freedoms of speech, religion, press and assembly.
They are rejecting the U.S. Dollar based monetary system and seeking alternatives. However, this process is greatly impeded by their unwillingness to let their own currencies float freely against other currencies – a condition necessary for “reserve status”. (Otherwise, governments can arbitrarily change the terms of trade.)
Therefore, to avoid a build up of the Dollar (which is subject to sanctions by the U.S.) they have turned more to gold. See Chart 1. This chart shows the buying of gold by central banks since 2014. As the chart illustrates, their purchases ramped up significantly in 2022 and have continued through the first half of this year despite the strong increase in gold's price.
Source: Metal Focus, World Gold Council
Gold satisfies China’s desire to have a freely traded “reserve currency “ (gold) that is not controlled by the U.S.
China’s overall aim is to return to the past glory when for centuries China was the dominant country in the world. That period featured authoritarian rule, mercantilist economic policies, limited personal freedoms, and gold as the primary currency.
At the same time, Putin seeks to restore as much of the former Soviet Union as he can. He has stated that its fall and break up in 1989 was the largest geopolitical failure in history. Putin, Xi, along with Khomeini (Iran) all see the destruction of the U.S. led western system as critical to their aspirations.
Gold has traditionally been thought of as a hedge against inflation, a hedge against major disasters, a hedge against financial collapses, as well as its intrinsic demand for jewelry. All of these remain true today.
However, the overriding factor favoring gold today is the worsening geopolitical backdrop. The major push by China and its like minded authoritarians to reduce their Dollar holdings and build gold reserves. These are price insensitive buyers.
We have recommended a gold position since 2004. For most of that period we recommended either a 5% or 6% allocation. In October of last year, we increased our recommendation to 8% due to the deteriorating geopolitical climate. Because of gold’s exceptional performance again in 2024, it now represents about 9.5% of those portfolios.