Watch out, America: China and Russia are stockpiling gold

(MarketWatch) I’ve never been a gold bug.

The yellow metal generates no cash, grows no crops, provides no shelter and supplies no useful service. It hasn’t been official money for decades. It isn’t any kind of “safe haven” because it always seems to be crashing or booming or crashing again. It hasn’t been an efficient way of verifying payment since Samuel Morse invented the telegraph.

But here’s the funny thing: It’s been going up. Big time. And for none of the usual reasons.

There’s no inflation. Prices are currently rising by about 1.6% a year.

There’s no obvious economic distress. The U.S. economy is growing by about 2.1%a year.

And there’s no financial panic. Stock markets are rising. Wall Street has been hitting new highs. Junk bond spreads — the extra interest that risky companies have to pay to borrow money — are low.

Yet for all that, gold has now risen 11% in the past two months. Over the past year, it’s up 15%. That’s more than the S&P 500 or the Nasdaq Composite. And more than the so-called FAANG stocks — Facebook, Apple, Amazon, Netflix and Google holding company Alphabet  — that are so fashionable on the Street.

‘Something’s going on here’

What’s going on? And, more interestingly, perhaps, is it worth a trade?

London hedge fund manager Crispin Odey, at Odey Asset Management, says the precious metal drew his eye during the stock market meltdown last fall. “Gold should have gone down last year,” he says from his plush offices in London’s Mayfair district. “It should have ended the year around $1,000 [an ounce]. Instead it was $1,200. I thought, ‘Something’s going on here.’ ”

The explanation? Some of America’s biggest geopolitical rivals were stockpiling gold. Especially China and Russia.

And they still are. The People’s Bank of China recently revealed hiking its gold reserves by 74 tons in the six months through May. The Russian central bank has bought about 96 tons in the first half of the year.

U.S. dollar hegemony

And there’s an obvious reason for China to buy gold. It wants to break up the global hegemony of the U.S. dollar — the hegemony that former French President Charles de Gaulle called America’s “exorbitant privilege.” It wants to make its own currency, the renminbi, a world player. And Odey argues that buying gold bullion is a natural move. Gold reserves should add to world confidence in the Chinese currency.

In other words, the U.S. president, by “Making America Great Again,” may also be Making Gold Great Again.

Do China and Russia really need piles of this arcane yellow metal to break the U.S. dollar’s stranglehold on the world’s financial system?

Can’t they just issue new currency backed by their economic output, as Europe did when it launched the euro 20 years ago?

Maybe, or maybe not. But that seems to be the way they’re betting.

We are at a very rare inflection point in history: The passage of economic hegemony. China’s economy has already overtaken America’s by one key measure, just as America’s once overtook Britain’s. These periods of transition, throughout history, have been times of instability.

Don’t fight the central banks

Odey, once a gold skeptic, has plunged into the metal now in one of his characteristically heavy ways. His flagship hedge funds, Odey European and OEI MAC, were about 40% invested in gold at the end of June.


”You want to do what the central banks are doing,” he says, with a laugh.

Where could gold go? Nobody knows, and Odey isn’t giving a forecast. In theory, some gold bugs argue, a breakdown in the dollar’s hegemony could send the yellow metal spiraling upward by several hundred percent. We shall see. 

The plunge in interest rates across the developed world is giving gold a fair tailwind as well. Who cares if it doesn’t pay interest? Trillions of dollars of bonds in Europe now actually have negative interest rates. By that measure, a cynic might say, gold’s 0% coupon looks like a bargain.

The simplest way for a retail investor to bet on gold is through the SPDR Gold Shares exchange traded fund. Those who want to bet on a sharp move, without risking too much of their capital, can always trade options on the fund.

Let it be said that Odey is something of a mad genius. He’s been spectacularly right on occasion: For example, he predicted the 2008-2009 financial crisis, and made out like a bandit. But he’s also had big bets go the other way. Overall he’s beaten the market indices by a healthy margin over the long term, even after fees. But if you are tempted to follow him into gold, be warned that his bets are not for the faint-hearted.


More Articles