Gold in a Fiat World

Gold isn’t just a relic—it’s a hedge, a reserve, and a statement. I sat down with Nitesh Shah, Head of Commodity Research at WisdomTree, to explore why central banks are stockpiling gold, how interest rate policy shapes metal markets, and what rising global debt means for hard assets.

Mary MacNamara

Hello everybody and welcome to the Cents of Security Podcast. My name is Mary MacNamara at Interactive Brokers, and today we’re talking to Nitesh Shah, Head of Commodity Research at WisdomTree about gold and silver. So, let’s start. How you doing, Nitesh?

Nitesh Shah

I’m great, thanks and thanks for having me back on your show.

Mary MacNamara

Gold has been treasured for thousands of years. What makes it still relevant in a digital first economy like smartphones, EVs, and solar panels and medical devices too?

Nitesh Shah

Yeah, gold is a precious metal. It’s relatively rare and pretty much all of the world’s mind gold is in existence right now. So, it makes gold quite different to most other, the metals in the sense that we have a large stock of above ground metal that is not largely consumed, as in, it’s not, most of the gold out there isn’t in machinery. It’s not in cans or stuff like that where you’d find with aluminum, tin or something like that. It makes, it gives it unique properties, and it’s acted for several millennia as a currency.

And today it still has a pseudo currency role and that’s what makes gold set apart from other metals. It still has huge amount of relevance because it has an amazing store of value. The value of a gold coin is pretty much the same today as it was several thousand years ago.

There’s an anecdote that you could pay a single gold coin to get a Roman army soldier. And today, if you calculate the equivalent salary of someone in the military, it’s roughly about the value of a gold coin. It’s like the permanent currency regime where fiat currencies, the paper currencies, are almost measured against this, because the fiat currencies experience inflation, which erodes their value. So, gold remains very relevant today. It’s typically not used in a huge amount of industrial applications just because it’s very valuable. It could be used, and we do use it in small amounts in cell phones, mobile phones, in computer equipment in some technological applications.

But because of its cost it’s not used as widely in industrial applications, but it has a very unique role in investors’ portfolios and for central banks who hold it as a reserve currency alongside the reserve currencie, other reserve currencies, like the Dollar, the Yen or the Euro.

Mary MacNamara

So why do central banks still hold massive reserves of gold?

Nitesh Shah

Great question. We don’t, we’re no longer in any gold standards and let me explain what those gold standards were. Historically many central banks backed their own currency with a stack of gold.

Countries like the UK had a gold standard. They backed most of their currency, base currency, with bit gold issued out as Sterling Notes. And then other current countries were backing their currencies with the Sterling. So, they in effect had a backing with gold.

The UK lost its role as the center of the gold standard. And that was passed on to the US in in the Bretton Wood system. But the Bretton Wood system also came to an end in the in the late seventies., but central banks have held onto a lot of that gold that they had during the period of these of these gold standards.

So, if you look at countries like the US, Germany, Italy, Spain, actually not Spain, but France they have close to, if you look at their gold reserves relative to the other FX reserves it’s close to 70, 80%, that kind of relative ratio. Now there are many countries around the world that weren’t participant in these gold standards directly.

Typically, a lot of the emerging market countries, but in the modern world they are seeing gold in a much more favorable light. And in the last few decades they’ve been accumulating a lot more gold. One of the reasons behind that is gold can’t be debased. I mentioned earlier on that gold is one of these assets that have held its value for millennia.

Whereas other currencies, they experience inflation which erodes their values and a lot of central banks when they hold their FX reserve, they rather not hold dollar or yen or euro because of that debasement effect and that debasement effect or the aversion to holding these G7 fiat currencies accelerated in 2022 and the big sort of watershed moment there was the start of the Russia, Ukraine war. When that war started, G7 countries froze Russia, central bank assets in their currencies, effectively weaponizing those currencies. When they did that, a lot of other central banks around the world said, “Oh, we’ll fall on the wrong side of the G7, this could happen to us”. So, what they’re doing is trying to allocate to other currencies, but the reason there aren’t any other places to go outside of the G7. The renminbi has capital controls, the Brazilian rial there’s a lot of volatility, the Argentinian Peso, there’s not really a huge amount of options out there.

And so, gold is the best option. Gold is the pseudo currency that every central bank is seeking. And since 2022, central bank buying of gold has doubled relative to the decade prior to 2022. And it’s been consistent. There’s been more than a thousand tons of gold being bought every year since 2022.

And if you look at surveys of central banks more and more of them just believe that they want to continue to accumulate more gold. There’s very few, there’s almost no central bank that’s saying, that believes they as a group will be selling down any of their gold holdings over the coming years. Central banks are massively in favor of gold at the moment.

Mary MacNamara

So, what impact does interest rate policy, especially from the Federal Reserve, have on the price of gold and silver?

Nitesh Shah

Yeah, broadly translated, lower interest rates tend to be gold price supportive and civil price supportive by extension.

Lower interest rates tend to reduce bond yields as well. When interest rates fall, bond prices tend to rise and that sort of lowers their yields. And generally, there’s a good relationship historically between a gold and bond yields. Now I said historically there’s been a good relationship between the two.

In recent years, we found that gold prices have actually risen even when bond yields were rising. So even when bond prices were falling, gold prices have been rising. The way I analyze gold is not by looking through any one singular lens. You need to look at all the factors that move gold prices together and I developed a model just over 10 years ago on describing gold prices. It’s been a very effective model, and it describes gold prices really well, both in direction and turning points. But it’s clear that all the factors need to be looked at together. And the model looks at bond yields, dollar inflation and some sort of measurements for investor sentiment.

They all need to be grouped together. An additional thing that should sit in the model is central bank demand for gold. The unfortunate thing is central bank data isn’t so great, so it makes calibrating that model hard and difficult to use when, including central bank data.

But it’s, there’s a clear picture of lower interest rates, which typically tend to generate lower bond yields and if the Fed is cutting interest rates faster than other central banks, it tends to be dollar depreciating and that’s also helpful for gold. And lower interest rates eventually lead to high inflation, so that also tends to feed into higher gold prices as well.

So, there’s multiple channels in which lower interest rates matter, but the bond yield, dollar and inflation are key drivers of gold prices. And if lower rates can move them it tends to be gold price positive.

Mary MacNamara

Very interesting. So, are we seeing a shift back towards hard assets like gold and silver in response to the rising global debt levels?

Nitesh Shah

That definitely seems to be a trend at the moment. We’ve already discussed the central banks. They are aggressively moving towards gold, not just because of the weaponization of those currencies, but also their worries about growing indebtedness and the pressure points that will manifest. The additional thing for a concern for a lot of investors is the so-called concept of fiscal dominance. And what I mean by that is When A country’s debt levels grow massively, it means that the interest payments the government has to pay become very large relative to the rest of their budget. In the US, for example, with rates where they are right now, the US is having to spend similar amounts on interest payments, so coupon payments on its bonds, as it has to on the military. I mean, it’s an insane amount, right? Now, that can get out of control and that can drive financial market instability. So central banks who, one of the hats that they wear is managing financial market stability, may have to think about how their policy tools like interest rates and quantitative easing and those things, can be used to manage some of those financial market instability issues that are stemming from high debts. So that’s the kind of concept of that fiscal dominance when high spending, potentially low taxes are driving up high debts. So that fiscal part of the equation is having an impact on the monetary system. The central bank has to interact with what’s happening on the fiscal side. And that’s a worry point. And I think more and more investors today are worried about fiscal dominance in the US with the Federal Reserve under particular pressure from the current administration. The current administration has been very vocal in its displeasure with the current chair. The current chair is leaving in May. but the new chair would have to be at least nominated by the current administration. And so there are worries that there is a lot more influence on the Fed. Now, if there’s more influence on the Fed, if the Fed is having to react to what the branches of the government are doing, that could weaken the faith in the dollar and drive expectations of inflation higher. Once again, this feeds back into a strong gold narrative, because gold is the antithesis to those fiat currencies, like the dollar. 

Mary MacNamara

So, in other words, they’re hedging their bets, right? They’re saying, just in case, right? And so possibly let’s add some gold to the portfolio or something. 

Nitesh Shah

Absolutely. I do think there is a lot of just in case. Because if you look at the broader markets, equity markets have been doing well this year. Gold has often historically been thought of as the recession asset, right? It’s like bonds. They do well in bad economic scenarios, in financial market shocks, et cetera. But we’ve had a relatively good equity market maybe last month as it means they’re great, but year to date, equity markets are doing relatively well. Yet, people are allocating more and more to gold. And I think all the risk factors are out there and investors saying, look, I want to be a participant in these cyclical markets, like the equities and commodities are doing really well, but I’ve got to hedge myself and gold is a great place to go. So if things do go belly up, My gold position will help me out. And I’ve increasingly seen more and more investors allocate a higher percentage of their portfolio into gold this year. 

So, what role do emerging markets play in the global demand for precious metals, especially as their middle classes grow?

Nitesh Shah

Great question. If you look at the largest segment of demand for physical gold it is actually the jewelry sector, and there in certain countries like India and China, there is a cultural affinity to, to gold.

It’s bought in during weddings. It’s bought during religious festivals, during the New Years. So, there’s a lot of gold buying around. There’s a lot of seasonal buying around festivity p periods and as these countries become more wealthy, the buying of gold intensifies. And there is that aspect of when you had a good economic year, you tend to find gold buying also increases as well.

But they are price sensitive markets. Jewelry markets tend to be quite price sensitive, and we right now are in record high gold prices. So, what we are seeing this year is a bit of a slowdown in the tonnage of gold being bought in these countries. The spending on gold remains at record height. What they’re putting, taking out their pocket in rupee or renminbi terms is massive.

But the in-tonnage terms is slowing down because gold has gotten more costly. It’s price sensitive. That has maybe favored other metals like platinum which is relatively cheaper than gold. But for now, gold buying has slowed, but silver being so much cheaper than, than then gold, roughly 80 times cheaper is getting a bit of a boost from that market. And silver is a very… physical markets for silver are extremely tight right now showing there’s been a quite an aggressive rally in, in silver prices lately.

But the, the, going back to your question. As the middle classes in these countries grows so is their jewelry demand in general. We haven’t really seen a kind of peaking out of that.

I know a lot of people had talked historically well these countries develop to a certain level, their cultural affinity will change and adapt.  Maybe in the margin because platinum has taken a bit more dominance in some of these markets within the last couple of decades. But not massively, not enough to really make a massive dent in hold buying and if anything, the rapid rise in gold prices have accelerated interest in gold. Certainly, earlier on this year Chinese buying of ex gold exchange traded funds. In the investment world was at record highs. This year China’s almost doubled its assets under management in gold exchange, shared lead funds. So, there is a huge amount of interest at the moment.

Mary MacNamara

So how closely are gold and silver prices correlated with macro indicators like GDP growth, unemployment, or consumer confidence?

Yeah, I think if we draw the line to the macro, it’s largely the things that are in my model. So, it’s dollar. As dollar a appreciates, it’s not good for good gold prices.

It is a depreciates. It’s good for gold prices. Bond yields as bond yields fall as in bond prices rise, that tends to be good for gold prices. Inflation as inflation rises, that tends to be good for gold prices. And there is that sentiment factor and then sentiment. Specific to gold. Now sentiment specific gold could be the opposite of sentiment.

Specific to cyclical indicators like, equity markets, at times they can be the opposite. Sometimes they are, they are, moving in the same direction. So thinking about GDP when you see strong economic growth, one of the byproducts of strong economic growth is often inflation.

So, we do often see gold prices rising during cyclically strong periods when economic growth is doing really well. But equally, gold prices do really well when on the opposite end of the spectrum, when the [00:16:00] economy is tanking, when you are in a recession, it does really well. It’s somewhere in the middle; it doesn’t do so great.

So it’s, it has this kind of bipolar behavior. It does well at the extremes. Also with unemployment, typically unemployment falls a lot when you are in good economic scenarios. Unemployment rises in bad economic scenarios, and you can draw the same sort of analogy there and similar sort of thing for consumer confidence. But the way I think of the macros is really inflation bond yields and the dollar.

Mary MacNamara

Thank you so much, Nitesh. That was awesome. This is once again Nitesh Shah, he is Head of Commodity Research at WisdomTree. Thank you so much for joining us today. And dear listeners, thank you so much for joining us!