Transcription
Hey everyone, it's Richard. You're watching the plain bagel. As you might have heard, there's been a bit of a gold rush in the markets lately. No, I'm not talking about AI stocks or Bitcoin, but this time actual gold. Uh, because the precious metal has seen its price surge year to date by over 60%, reaching a new all-time high of nearly $4,400 earlier this week. Riley, that's even extended to silver, which itself has surged by a similar degree to new all-time highs. And we've seen a real mania around the shiny metal. People have been circling blocks, lining up outside of gold dealers in Australia and Vietnam. Interest in "buy gold" searches have reached all-time highs. I decided to crack this out of the, uh, costume box. Uh, even Donald Trump has gotten in on the action, accumulating gold himself on the walls of the Oval Office. I'll be, I've been informed that some of it is just plastic spray-painted that color, which is a bit awkward to be caught with, uh, faking gold like that. Uh, by the way, this is a dollar bill. I don't know if you saw that, but I'm going to take this off.
But amid all this euphoria about the shiny metal, a fairly concerning narrative has been making the rounds and gaining traction around why people are ultimately buying this asset. The so-called debasement trade. The idea that amid ballooning deficits, political turmoil, and gold-buying activity from central banks, that the rise in gold's price actually reflects a world that's preparing for the inevitable collapse or replacement of the US dollar. That we are fast approaching the end of the old world order and quickly reaching the beginning of the older world order, I guess, because we're talking about gold here. So, which is it? Are we simply seeing the latest market fad, or are we truly heading towards a new golden age, for better or for worse? Well, that's what we'll try to decipher in today's video, to discuss gold as an investment class, the different narratives around why it's reaching new all-time highs, and some considerations worth going through before you really subscribe to either story here.
A quick thank you to Brilliant for sponsoring today's video. Stick around until the end to learn about how you can start learning math, coding, and other topics for free and get a discount on an annual subscription.
Before hopping into it, let's start with a high-level overview of why investors generally buy gold in the first place. If this is something that you're familiar with, you can skip the section using the timestamps in the description down below. But for the uninitiated, the idea of buying gold as an investment probably seems pretty bizarre. After all, gold doesn't produce any sort of cash flow or yield. And while it does have those industrial uses that gives it that sort of commodity value, 44% of demand is simply for financial purposes, with roughly a fifth of all gold ever mined simply being held by central banks. So why is it that people park their money in this very specific precious metal? Well, there are a few reasons for it. For one, the market tends to view gold as a safe-haven investment. That is, something that will retain or even grow its value during periods of turmoil. Historically, for example, the precious metal has passed key price levels during periods of market stress, passing $1,000 an ounce with the onset of the Great Financial Crisis, $2,000 during the COVID-19 pandemic, and $3,000 earlier this year with Trump's initial tariff rollout. It's also, of course, fairly rare, with gold's total supply only growing by about 2% annually. And part of that is actually recycled gold. So, it's not even all just new gold coming out of the ground. So, because of that, gold is also viewed as an inflation hedge, or something that again, will retain its value when fiat currencies are losing theirs.
But by far the biggest reason why gold gets this treatment is simply its history. The mere inertia of having previously been treated as a financial asset or form of money. Something that goes back thousands of years, with it being widely coveted for jewelry and religious institutions historically for its non-corrosive properties and luster, with it up until the 1900s being used for coinage or to otherwise back the value of money, with it even today still being held by central banks to help support the value of their currencies. Now, of course, with developed countries having abandoned the gold standard in the 1970s, there's long been some controversy over the role of gold in the modern economy, with some viewing it as a relic of a time long past, much like seashells or rice. While others are adamant that even today, it's the only form of money worth anything. But this debate over gold is really nothing new. So-called gold bugs, or gold enthusiasts, have been rooting for its resurgence for quite some time.
But what's fueling the precious metal rally today? What's brought it back in fashion? Well, probably not this. Uh, but Donald Trump has interestingly played a role in the price resurgence. As mentioned, investors tend to flock to the precious metal during periods of uncertainty. And well, look around. For one, there's the economic uncertainty. As we all know, Trump's tariffs have been causing quite a bit of upheaval for global supply chains, uh, for most of this year. And recently, we've seen tensions reignite between China and the United States, with Trump threatening a 100% tariff against Chinese goods starting November 1st. And while the boom-and-bust AI has certainly bolstered activity in the economy, a number of analysts have been ringing the alarm bells, warning of a potential recession just around the corner. With Goldman Sachs putting the probability of a recession over the next 12 months at 20% as of September, JP Morgan putting the odds at 40% as of July, and one UBS analyst putting the probability at a staggering 93% as of September, with some even buying gold as a hedge against this supposed AI bubble. The idea that with valuations being so high for AI stocks and so much unsustainable activity in the space, that there's the risk of a severe correction, with some investors choosing to hide their money in anticipation.
But one of the main economic concerns being flagged as driving some gold demand here is government debt loads, which have reached very high levels, with deficits continuing to expand and with interest rates still being fairly high. The interest burden of that debt alone risks causing some problems. Something that would only be exacerbated by a recession. So that's the first thing. There's a lot of anxiety around the state of the economy. A second factor driving this gold demand has been the political uncertainty, headlined again by none other than Donald Trump, whose unconventional whiplash policies and actions have raised concerns over America's checks and balances and the overall integrity of the US dollar. With there being particular concern over Trump's targeting of the Federal Reserve, with Donald Trump having publicly criticized and attempted to pressure Jerome Powell to cut interest rates, and having attempted to fire Federal Reserve board member Lisa Cook over seemingly unfounded mortgage fraud allegations, with the intent there seeming to be to replace her with someone more willing to follow Donald Trump's direction. In addition to the concerns around the Federal Reserve, there's also the government shutdown, which has recently become the second longest in history, with Democrats and Republicans refusing to compromise on a spending bill to keep the government open. Something that seemingly helped get gold across the $4,000 mark earlier this month.
And importantly, it's not just the US experiencing political turmoil here. Uh, in France, the Eurozone's second largest economy, we've seen the country go through four different prime ministers in less than two years amid political divides in parliament. With even the current prime minister having recently resigned, only to be later reappointed. And with the appointment of a stimulus-friendly prime minister in Japan, there are concerns that the debt-heavy country will see further deficits in the future, with both these countries seeing their bond yields increase, representing weak demand for government bonds. So with all this uncertainty, you can see why many investors have been migrating to gold here as a safe-haven asset.
But there's one other important buyer in the market that's in part been fueling this rally, and that is central banks. You see, following the abandonment of the gold standard, we saw a general trend of central banks offloading their gold reserves. With the US dollar ultimately replacing gold as a key reserve asset. Over the last few years, central banks have become the biggest buyers of the precious metal, buying at their fastest pace since at least the 1950s. With the past three years, each seeing over 1,000 tons of bullion being purchased by the institutions, with the total gold held by central banks estimated to sit around 36,000 metric tons. In fact, you might have seen the headline that for the first time since 1996, central banks now hold more gold in their reserves than US Treasuries. And some have speculated that it's the central bank mine activity that's ultimately spurring investors to jump into the space, with many retail investors getting exposure via gold ETFs rather than actually owning the precious metal. These investment vehicles offer share representations of physical gold and have had a record year of buying activity. In just the first nine months of 2025, with more than $60 billion flowing into gold ETFs so far. Albeit, total assets in gold ETFs do remain below their 2020 peak when the pandemic was fueling a lot more holding. So we really are seeing buying from all fronts here, from institutions, retail, and central banks.
But it brings us back to the debate about what this all ultimately represents, with some again highlighting that this reflects the ultimate debasement trade. Currency debasement refers to the historical practice of rulers slowly eroding trust in their currency by mixing gold and silver coins with less valuable metals. Something that's argued to have contributed to the collapse of the Roman Empire in 476 AD, even though that did technically happen 200 years after the coin stopped having meaningful gold or silver content. And as the name implies, some have argued that with the current ballooning US debt load, uh, the weaponization of the dollar against Russia in 2022, and political instability in general, the US dollar is slowly being debased, with many referencing the 10% decline in the value of the US dollar this year alone, the fact that the dollar's makeup of foreign reserves has been decreasing, and of course, the surge in gold's value. We've had a lot of big names adding fire to this narrative, even if not directly supporting it. Ken Griffin of Citadel, Ray Dalio of Bridgewater, and Jamie Dimon of JP Morgan have all highlighted the risks of the US debt situation, noting gold's role to varying degrees in hedging against these risks.
So with these narratives, all this interest, and of course the price chart, it's very easy to get caught up in this narrative. And there is, of course, a chance that gold continues to rise in price from here. But before you subscribe to the most extreme narratives here around dollar debasement and the like, there are a few things worth considering. For one, while individual investors may, of course, be buying gold for any assortment of reasons, there's not a whole lot of evidence that the debasement trade is what's driving most market activity here. In terms of the dollar being down this year, we haven't actually seen much movement in the dollar index since April, while gold has seen roughly half of its massive surge during that period. And the dollar itself is still roughly flat from three years ago. So that decline doesn't really explain gold's massive price appreciation. In fact, if you price gold in terms of oil barrels, you can see that even when you strip out the dollar, the metal's value has surged dramatically. We also haven't really seen any changes in inflation expectations, suggesting that, uh, gold's surge in price doesn't really reflect a debasement scenario of runaway prices. In terms of US Treasury bonds, their yields don't really reflect this abandonment to the dollar. In fact, Treasury bonds have actually increased in price since May.
Also brings us to another important point around the foreign reserves of central banks. Well, yes, it is true that gold has replaced US Treasury bonds in terms of value, that has more so to do with the surge in gold's price rather than the quantity of gold held increasing meaningfully. Remember, gold's price has more than doubled over the past couple of years. So, it's not really surprising that its share of these reserve market values has increased relative to Treasury bonds, which have been relatively flat. And that's just Treasury bonds, a type of US asset. But US dollars continue to be the number one foreign reserve asset, with there being roughly $7 trillion in US dollars held versus the roughly $5 trillion in gold. Now, we are seeing the dollar's share of total foreign reserves decrease over time, and that's certainly been exacerbated by recent events, but it's far from having been replaced at this point.
And there's also a really important point around which central banks are actually buying gold here. Because while headlines might give this impression that nations around the world are rushing to buy gold here, that's really not the case. The biggest buyers of gold year to date have been Poland, Kazakhstan, and Turkey, with China, India, and Russia also being notable buyers over the past few years. But these countries don't really reflect global interest in gold. According to a World Gold Council survey, while the percentage of countries looking to increase their gold reserves has been on the rise, most central banks aren't planning to increase their gold allocation. And those that are tend to be from emerging markets and developing economies. So you are seeing a handful of countries aggressively accumulating gold, some of which do have a very active interest in moving away from the US dollar. And the percentage of countries interested has again been increasing. We haven't seen as much buy-in from the larger world powers. And that kind of makes sense. The reason central banks have foreign currencies on hand is to allow them the liquidity to transact quickly when enacting policy. And while gold is a fairly liquid asset, it can still drag down the price to have to sell before doing these transactions compared to just having US dollars or even Treasuries, which can be borrowed against very easily. And while it's great to hold an asset that's appreciating in value, it might not be a smart allocation to jump in after we've seen this volatile price appreciation. Not to mention, it's a costly asset to store and doesn't generate any sort of income while you're holding it. And what's interestingly looked over quite a bit is while there's often this debate of the US dollar versus gold or other alternative assets, the US central bank is actually the one set to gain the most from gold's price appreciation, given that they currently own the largest amount globally. So, some initial thoughts around the debasement trade and why you should be skeptical of this sort of overarching narrative.
Uh, the second big consideration here is that while gold is often treated by investors as this safe and secure store of value, it's worth highlighting that historically, that property hasn't always held. It's easy to get caught up in the belief that because of gold's rarity, its value will mathematically increase over time as the dollar experiences inflation. But in the past, there have been extended periods where gold's value has fallen against the US dollar, with there being a 20-year period starting in the 1980s where gold fell in price. And something being scarce doesn't inherently draw demand. Uh, platinum, for example, is a metal that's actually 30 times rarer than gold that currently trades at a third of gold's price. Because again, a lot of gold's demand is based on its historical inertia, not strictly speaking, its scarcity. And with the sharp increase in gold's price that we've seen, there's naturally the risk of a correction. Bank of America analysts have highlighted that this sort of price movement has only occurred three times before historically, each of which were followed by 20 to 33% declines. And at least one of those declines was actually fueled by central banks themselves. A sell-off that only ended when they signed the Washington Agreement, agreeing to limit how much gold they would sell. And while it's certainly too early to call it a reversal, we have already seen the metal drop over 5% from its peak reached earlier this week, demonstrating that this safe-haven asset can get quite volatile when people are rushing into it.
But it brings us to the ultimate question, Richard, where does gold's price go from here? Uh, to which I would respond, I have no idea. Again, as mentioned, hopefully it goes to emphasize that the price of the asset is really based on future demand trends, which are hard to determine. If we see a cooling of the political and economic environment, or interestingly, if we see rising yields, which itself could demonstrate a weakness for US Treasuries, those are all factors that have been highlighted as things that could lead to a cooling of gold prices. And with gold price surging amid a seeming perfect storm of factors, the reversal of any one of these things, whether it be a trade deal with China or a reopening of the government, could contribute to a pullback. But the truth is that we just don't know where things will go from here. Whether the political situation will continue to heat up or if we see agreements around tariffs and trade deals. Because there's so many factors at play, it's impossible to predict the demand trends for something like gold over time. And historically, you can see that demand has fluctuated quite a bit.
Now, it's not to say everyone buying gold right now has this sort of doom-and-gloom expectation. Some are just buying it as this hedge against tail risks, something that they're willing to spend the money and potentially lose it for the sake of just offsetting any sort of, you know, catastrophic event in the US. But my point is not to argue that gold's price won't increase or that it's certainly going to decrease from here, but rather just to highlight the risks, given that many people view this as the ultimate store of value, something that over time has maintained its worth when that hasn't been a guarantee.
Thank you for watching. And before I sign off, you like charts? You get your dopamine hits from a good X-Y axis? What about AI? Curious how AI does that thing? Well, what if I told you that you could learn more about the inner workings of these things and how many other subjects worked? That's right, because today's sponsor, Brilliant, offers a learning platform for subjects ranging from math and data science to AI and programming. Now, of course, learning platforms are nothing new, but what's really unique about Brilliant is that they focus on active participation. That is, incorporating activities that allow you to play with the concept and work through exercises to enhance your understanding of the topic, rather than just having you watch two-hour lecture videos. Their data module, for example, covers everything from data visualizations to statistical models and measurements. But the activities visualizing what can otherwise be fairly difficult to grasp topics. Like I mentioned, for example, how platforms like ChatGPT use tokens to ultimately run their AI models. What's also handy is that the lessons are bite-sized, meaning you can tackle it in just a few minutes of dedication a day. Or if you want to dedicate and push through a topic, you can put in as much time as you please. And the best part is that you can try Brilliant completely free. Just go to brilliant.org/theplainbagel, scan the QR code on screen, or click the link in the description. Brilliant's also going to give viewers 20% off an annual premium subscription, which gives you unlimited daily access to everything on the platform. Thank you, Brilliant. And thank you guys for joining me today. I hope you found this video helpful. If you did, please do make sure to like, subscribe, all that good stuff. It does help the channel tremendously. And let me know your thoughts on gold. Whether you think it's a relic of the past or you think it might beat out the dollar as the top reserve asset. Personally, I'm hedging my bets with the, uh, the golden dollar dollar bill chain. This was like five bucks from Amazon, but I'm getting my money's worth. Thanks again for joining me, and as always, be safe out there.