Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? (2nd of 3 Part Series)

 

In the course of history various commodities have been employed as media of exchange. A long evolution eliminated the greater part of these commodities from the monetary function. Only two, the precious metals gold and silver, remained. In the second part of the 19th century, more and more governments deliberately turned toward the demonetization of silver. In all these cases what is employed as money is a commodity which is used also for nonmonetary purposes. Under the gold standard, gold is money and money is gold. It is immaterial whether or not the laws assign legal tender quality only to gold coins minted by the government—Ludwig von Mises 

This post is the second in a three-part series 

In this Issue 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order?

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise

II. A Brief Recap on Gold’s Role as Money

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard)

IV. The Age of Fiat Money and the Explosion of Debt

V. Central Banks: The Marginal Price Setters of Gold

VI. Is a U.S. Gold Audit Fueling Record Prices? 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? 

The second part of our series examines the foundation of the global economy—the 54-year-old U.S. dollar standard—and its deep connection to gold’s historic rally. 

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise 

Global central banks have played a pivotal role in driving gold’s record-breaking rise, reflecting deeper tensions in the global financial system. 

Since the Great Financial Crisis (GFC) of 2008, central banks—predominantly those in emerging markets—have significantly increased their gold reserves, pushing levels back to those last seen in 1975, a period just after the U.S. government severed the dollar’s link to gold on August 15, 1971, in what became known as the Nixon Shock. 

This milestone reminds us that the U.S. dollar standard, backed by the Federal Reserve, will mark its 54th anniversary by August 2025.

Figure 1

The accumulation of gold by central banks, particularly in the BRICS nations, reflects a strategic move to diversify away from dollar-dominated reserves, a trend that has intensified amid trade wars, sanctions, and the weaponization of finance, as seen in the freezing of Russian assets following the 2022 Ukraine invasion.  (Figure 1, upper window)

The fact that emerging markets, particularly members of the BRICS bloc, have led this accumulation—India, China, and war-weary Russia have notably increased their gold reserves, though they still lag behind advanced economies—reveals a growing fracture in the relationship between emerging and advanced economies.  (Figure 1, lower graph and Figure 2, upper image)  

Figure 2

Additionally, their significant underweighting in gold reserves suggests that BRIC and other emerging market central banks may be in the early stages of a structural shift. If their goal is to reduce reliance on the U.S. dollar and close the gap with advanced economies, the pace and scale of their gold accumulation could accelerate (Figure 2, lower chart)

Figure 3

As evidence, China’s central bank, the People’s Bank of China (PBOC), continued its gold stockpiling for a fourth consecutive month in February 2025. (Figure 3, upper diagram)

Furthermore, last February, the Chinese government encouraged domestic insurance companies to invest in gold, signaling a broader commitment to gold as a financial hedge. 

This divergence underscores a deepening skepticism toward the U.S.-led financial system, as emerging markets seek to hedge against geopolitical and economic uncertainties by strengthening their gold reserves 

In essence, gold’s record-breaking rise may signal mounting fissures in today’s fiat money system, fissures that are being expressed through escalating geopolitical and geoeconomic stress. 

II. A Brief Recap on Gold’s Role as Money 

To understand gold’s evolving role, a brief historical summary is necessary. 

Alongside silver, gold has spontaneously emerged and functioned as money for thousands of years. Its finest moment as a monetary standard came during the classical gold standard (1815–1914), a decentralized, laissez-faire regime in Europe that facilitated global trade and economic stability. 

As the great dean of the Austrian School of Economics, Murray Rothbard, explained, "It must be emphasized that gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium. Above all, the supply and provision of gold was subject only to market forces, and not to the arbitrary printing press of the government." (Rothbard, 1963) 

However, this system was not destined to endure. The rise of the welfare and warfare state, supported by the emergence of central banks, led to the abandonment of the classical gold standard. 

As Mises Institute’s Ryan McMaken elaborated, "This system was fundamentally a system that relied on states to regulate matters and make monetary standards uniform. While attempting to create an efficient monetary system for the market economy, the free-market liberals ended up calling on the state to ensure the system facilitated market exchange. As a result, Flandreau concludes: ‘[T]he emergence of the Gold Standard really paved the way for the nationalization of money. This may explain why the Gold Standard was, with respect to the history of western capitalism, such a brief experiment, bound soon to give way to managed currency.’" (McMaken, March 2025) 

The uniformity, homogeneity, and growing dependency on the state in managing monetary affairs ultimately contributed to the classical gold standard’s demise. 

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard) 

World War I forced governments to abandon gold convertibility, leading to the adoption of the Gold Exchange Standard—where only a select few currencies, such as the British pound (until 1931) and the U.S. dollar (until 1933), remained convertible into gold. 

Later, the Bretton Woods System attempted to reinstate a form of gold backing by pegging global currencies to the U.S. dollar, which in turn was tied to gold at $35 per ounce. 

However, rising U.S. inflation, fueled by fiscal spending on the Vietnam War and social welfare programs, combined with the Triffin dilemma, led to a widening Balance of Payments (BoP) deficit. Foreign-held U.S. dollars exceeded U.S. gold reserves, threatening the system’s stability. 

As economic historian Michael Bordo explained: "Robert Triffin (1960) captured the problems in his famous dilemma. Because the Bretton Woods parities, which were declared in the 1940s, had undervalued the price of gold, gold production would be insufficient to provide the resources to finance the growth of global trade. The shortfall would be met by capital outflows from the US, manifest in its balance of payments deficit. Triffin posited that as outstanding US dollar liabilities mounted, they would increase the likelihood of a classic bank run when the rest of the world’s monetary authorities would convert their dollar holdings into gold (Garber 1993). According to Triffin, when the tipping point occurred, the US monetary authorities would tighten monetary policy, leading to global deflationary pressure." (Bordo, 2017)

Bretton Woods required a permanently loose monetary policy, which ultimately led to a mismatch between U.S. gold reserves and foreign held dollar liabilities. 

To prevent a run on U.S. gold reserves, President Richard Nixon formally ended the dollar’s convertibility into gold on August 15, 1971, ushering in a fiat money system based on floating exchange rates anchored to the U.S. dollar. 

IV. The Age of Fiat Money and the Explosion of Debt 

With the shackles of gold removed, central banks gained full control over monetary policy, leading to unprecedented levels of inflation and political spending. Governments expanded their fiscal policies to fund not only the Welfare and Warfare State, but also the Administrative/Bureaucratic State, Surveillance State, National Security State, Deep State, Wall Street Crony State, and more. 

The most obvious consequence of this system has been the historic explosion of global debt. The OECD has warned that government and bond market debt levels are at record highs, posing a serious threat to economic stability. (Figure 3, lower chart) 

V. Central Banks: The Marginal Price Setters of Gold 

Ironically, in this 54-year-old fiat system, so far, it is politically driven, non-profit central banks—rather than market forces—that have become the marginal price setters for gold. 

Unlike traditional investors, central banks DON’T buy gold for profit, but for political and economic security reasons. 

The World Gold Council’s 2024 survey provides insight into why central banks continue to accumulate gold: "The survey also highlights the top reasons for central banks to hold gold, among which safety seems to be a primary motivation. Respondents indicated that its role as a long-term store of value/inflation hedge, performance during times of crisis, effectiveness as a portfolio diversifier, and lack of default risk remain key to gold’s allure." (WGC, 2024) 

This strategic accumulation reflects a broader trend of central banks seeking to insulate their economies from the vulnerabilities of the fiat system, particularly in an era of heightened geopolitical risks and dollar weaponization.

Figure 4 

The Bangko Sentral ng Pilipinas (BSP) has historically shared this view. (Figure 4, upper graph) 

In a 2008 London Bullion Management Association (LBMA) paper, a BSP representative outlined gold’s importance in Philippine foreign reserves—a stance that remains reflected in BSP infographics today. 

Alas, in 2024, following criticism for being the largest central bank gold seller, BSP reversed its stance. Once describing gold reserves as "insurance and safety," it now dismisses gold as a "dead asset"—stating that: "Gold prices can be volatile, earns little interest, and has storage costs, so central banks don’t want to hold too much." 

This shift in narrative conveniently justified BSP’s recent gold liquidations. 

Yet, as previously noted, history suggests that BSP gold sales often precede peso devaluations—a warning sign for the Philippine currency. (Figure 4, lower window)

VI. Is the Propose U.S. Gold Audit Help Fueling Record Prices? 

Finally, could the Trump-Musk push to audit U.S. gold reserves at Fort Knox be another factor behind gold’s rally? 

There has long been speculation that U.S. Treasury gold reserves, potentially including gold stored for foreign nations, have been leased out to suppress prices.

Figure 5

Notably, Comex gold and silver holdings have spiked since these audit discussions began. Gold lease rates rocketed to the highest level in decades last January. (Figure 5, top and bottom charts) 

With geopolitical uncertainty rising, central bank gold buying accelerating, and doubts growing over fiat stability, gold’s record-breaking ascent may be far from over. 

Yet, it’s important to remember that no trend goes in a straight line.

___

References 

Murray N. Rothbard, 1. Phase I: The Classical Gold Standard, 1815-1914, What Has Government Done to Our Money? Mises.org 

Ryan McMaken, The Rise of the State and the End of Private Money March 25,2025, Mises.org 

Michael Bordo The operation and demise of the Bretton Woods system: 1958 to 1971 CEPR, Vox EU, April 23, 2017 cepr.org 

World Gold Council, Gold Demand Trends Q2 2024, July 30,2024, gold.org

BSP Has Been Right: No Foreign Exchange Crisis…For Now; But Devaluation Policies Amplify Risks!

From Daily Mail:

MANILA, Aug 25 (Reuters) - The Philippine central bank is in firm control of the peso and is confident that the country is not facing a foreign exchange crisis, its governor said on Friday, as the currency hovered around 11-year lows. "We allowed the peso to adjust moderately and gradually but I can assure you the BSP (central bank) is in firm control of the exchange rate," Nestor Espenilla told a business forum. "We remain confident that we are not talking about a freefall situation. Definitely we are not in a foreign exchange crisis."

Huh? Foreign exchange crisis? Didn’t the Philippine peso ever get the memo from the asset bubble religion that NOTHING can ever go wrong???  I repeat with emphasis: NOTHING!

And that “crisis” as a socio-economic lingo signifies a taboo? Why then the utterance of a “crisis”? That would be so politically incorrect!

 

It seems that the BSP has been reacting to concerns raised by some influential quarters. Otherwise, such “crisis talk” would not surface at all. The BSP’s response to the “free falling peso” has not been the first time or has signified a follow through from the other week.

Well, the USD peso has risen 1.63%, 1.0% and fell .8% over the last three weeks. Or the peso tanked by 1.8% in three weeks. Year-to-date, the USD peso remains up at 2.74%. In a world of falling US dollar, the peso has stuck out like a sore thumb in the Asia region (left).

So concerns over these may have prompted for the BSP’s reaction.

Though I would agree with the BSP for now, I would add to his statement "we are not in a foreign exchange crisis…YET"

Let me give you a hint when the pesos’ fall mutates into a crisis…

From the great Austrian economist Ludwig von Mises* (bold mine)

"If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely.  The purchasing power of the monetary unit will decline more andmore, until finally it disappears completely. To be sure, one could conceive of the possibility that the process of monetary depreciation could go on forever. The purchasing power of the monetary unit could become increasingly smaller without ever disappearing entirely. Prices would then rise more and more. "

*Ludwig von Mises 1. Monetary Depreciation p.2-3 I. The Outcome Of Inflation The Causes Of The Economic Crisis, Mises.org

By the way, Venezuela’s hyperinflation evidenced by the crashing bolivar represents a real-time example of this phenomenon.

And as I have repeatedly been pointing out here, the BSP has engaged in aggressive monetization of the National Government’s (NG’s) debt. Such money printing (emergency) operations, which had been reactivated in the 2H 2015, represents inflationary financing. In short, as evidenced by incumbent policies, the peso ispurposely being devalued. (see Chart of the Day: Debt Monetization represents a Policy of Devaluation! July 7, 2017)

Below represents proof that the present BSP actions have been designed.

From a lecture by BSP’s Dr. Dante Canlas in 2012**

[**Dr. Dante Canlas, BSP Sterling Professor of Monetary and Banking Economics, Business Fluctuations and Monetary Policy Rules in the Philippines: Lessons from the 1984­1985 Contraction April 30, 2012 p 14-17 BSP.org.]

"A prior issue is this: is inflation a monetary phenomenon Friedman had said “inflation is always and everywhere a monetary phenomenon.” With a quantity theory of money in mind, if the central bank increases the money supply from a position of balance, then the real money stock exceeds the demand for it. To restore balance, the general price level must rise, which means inflation rate, defined as the percentage change in the general price level must rise.

And thus…

"Money growth that is inconsistent with a fixed exchange rate or a tightly managed float tends to be unsustainable. A fixed exchange rate collapses in finite time, particularly if money growth, rooted in persistent deficit financing of the government budget is excessive. Likewise, a managed float based on interventions in the foreign exchange market designed to keep the exchange rate within a narrow band is vulnerable to speculative attacks, resulting in a sharp depreciation

"If the central bank increases the money supply… rooted in persistent deficit financing", then incumbent policies represents demonstrated or revealed preference. The peso is being devalued.

Pls. understand that speculative attacks on a currency have neither been random events nor have emerged out of a vacuum. ‘Speculative attacks’ signify as symptoms of imbalances extant in the system. Theimbalance of which, as stated by the expert, has been excessive money supply growth. Thus, the BSP practices some theories consistent with the Austrian economics. So when the currency markets smell something wrong, the markets prices the currency to approach its “equilibrium” price level or exchange ratio through arbitrage opportunities.

Back to the great Mises who reinforces the market’s function as an equilibrating mechanism***:

"Whenever such opportunities for profit exist, buyers would appear on the foreign exchange market with a demand for the undervalued money. This demand drives the exchange up until it reaches its “final rate.” Foreign exchange rates rise because the quantity of the [domestic] money has increased and commodity prices have risen. "

***Ludwig von Mises 2. PURCHASING POWER PARITY V. COMMENTS ON THE “BALANCE OF PAYMENTS” DOCTRINE p.26-27 The Causes Of The Economic Crisis, Mises.org

Hence, when the BSP threatens to implicitly intervene through the statement that they are in “firm control of the exchange rate”, they are simply contradicting themselves. 

Back to Dr. Canlas, “a managed float based on interventions in the foreign exchange market designed to keep the exchange rate within a narrow band is vulnerable to speculative attacks, resulting in a sharp depreciation”

The more interference in the price setting motion, the greater the fall of the peso!

Interventions have always had time inconsistent effects. Interventions may smooth currency price actions today at the expense of more imbalances tomorrow.

Even more, while debt monetization weakens the peso, actual intervention only attenuates the BSP’s balance sheets thereby reinforcing the peso’s fall overtime.

Strains of the peso have been everywhere…

 

In 2013, I questioned the sustainability of the “record” narrowing of spreads between US treasury yields and the Philippine yield equivalent, “Per capita GDP of the US represents 11.32x the Philippines, yet bond markets are presupposing that the Philippines will narrow the gap substantially soon (!!)…Yet how will we attain this? Pump up bigger bubbles?” [Phisix: The Convergence Trade in the Eyes of a Prospective Foreign Investor November 11, 2013]

What was once convergence has now transformed to divergence! The yield spread between 10-year bonds of the Philippines and the UST notes have been increasing. Such embodies the broadening differences in relative inflation (uppermost chart). Yes, that would be another bullseye for me!

Additionally, the BSP has increasingly depended on forex derivatives to bolster its Gross International Reserves. FX derivatives have now reached “record” levels. (middle window)

Finally, BSP-NG selling of UST holdings in support of the peso has been apparent even in the US Treasury TIC data (lowest window)

This brings us back to the BSP response to media on the foreign exchange crisis.

“Current Account” or “BoP” has only served as the convenient bogeyman. Imbalances of CA and the BoP signify manifestations of the domestic policies. I will elaborate on this in the future.

As a side note, even as tax revenues outperformed, July’s fiscal deficit has swelled again. The Bureau of Treasury (BoTr) has yet to issue the updated data on the National Government’s outstanding debt. The Bangko Sentral ng Pilipinas will release its depository survey/liquidity survey and bank lending conditions next week. I will discuss this only when the data have all been in place.

Please understand too that BSP deficit financing has not just been the only cause of the plight of the peso.

I have been a USD-Php bull since 2014, or when the BSP exploded its money supply growth at 30%+++ rate for 10 consecutive months. Then, it had entirely been the banking system responsible for the remarkable money supply inflation.

Today, both the BSP and the banking system have been working overtime to expand the money supply. Monetary inflation has been aimed at generating revenues for the NG through direct taxes and through the inflation tax.

In conclusion:

All actions have consequences.

The travails of the peso signify an outcome or a ramification of the FREE LUNCH policies implemented by the government.

The risks of a currency crisis will only magnify IF the BSP continues or even accelerates the prioritization of such invisible transfers to the government and to the elites, through the channels of debt monetization and easy money policies.

In reality, the BSP has not told the public the truth. The government, through the BSP, has willfully embraced policies to devalue the peso.

Asset Bubble Religion and the Propensities to Swindle

And curiously, while the BSP has been alleviating the public’s concern of the foreign exchange crisis, the asset bubble religion has only become more entrenched.

Fanatics have come to believe that asset bubbles come with no costs/no risks and have only benefits. And because they believe that asset bubbles have become a permanent fixture, intensifying intolerance has become a response towards any opposition to such utopian outlook.

They can be analogized to the growing political fragmentation in the US between the extreme (Antifa) left and the extreme nationalists, the “alt right”. Because of the intensifying intolerance due to “you are with us or against us” mentality (false choice), violence has been mounting. Even some unfortunate Filipinos (recently in Canada) have been caught in the crossfire from such increasingly partisan or divisive politics.

 

Intolerance spawns friction.

One can’t generate “business” unless one belongs to the bullish camp. So they say.

In domestic stocks, transactional payoffs have been made primarily on the upside. Additionally, shorts are hardly used. Therefore, the current system built on an upside bias make this assumption partly true. But that certainly does not apply now.

Well, the Phisix has been locked in at 8,000 for the past 2-3 weeks, yet where has the business been????

Daily trade volume has shriveled at a stunningly rapid rate – faster than its previous predecessors in 2015 and 2016! (upper chart) But for the antecedents, volume shrinkage matched prices: The PSEi had been in downtrends! This time it is different.

The average volume last week was at Php 5.7 billion. In 2017, there had been only three occasions where volume was equal or lower than this: March 3 (Phisix 7,247.12), February 3 (7,226.7) and January 20 (7,232.66). 2016 ended with Php 4.35 billion (6,840.64).

In other words, volume has not matched prices at present levels.

So despite sinking volume, why has the Phisix remained at 8,000? One simple and obvious answer: Corrections have NOT been permitted (see lower window).

Price fixing has become institutionalized! “Volume PRECEDES prices” a chart technician would say. But such would be a truism in the condition that markets have been allowed to work.

The prevailing mindset has been that markets are out there for convenience (sensory and egotistical gratification, hedonism, social status among many others) and not for allocation purposes. So the deformation of markets has become the order of the day. In short, stock markets have been perceived as free money ATMs.

Price fixing has already signified symptoms from such asset bubble zealotry. Such depravity, of course, also means many uncovered malfeasances elsewhere.

As historian Charles P Kindleberger****, “The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves. And for the signal for panic is often the revelation of some swindle, theft, embezzlement and fraud.”

****Charles P Kindleberger Manias Panics and Crashes Third Edition p.66

In the US, one of the biggest banks was recently fined for the opening of many spurious accounts. The same bank was likewise accused of making unauthorized changes to customer’s mortgages or even without the customer’s knowledge. Lately, the same bank had recently been exposed for charging unneeded auto insurance to people who took out car loans.

In Canada, early this year many employees went on air to whistleblow on their employers for hard selling to their clients.

From the CBC News (March 15, 2017): “Employees from all five of Canada's big banks have flooded Go Public with stories of how they feel pressured to upsell, trick and even lie to customers to meet unrealistic sales targets and keep their jobs. The deluge is fuelling multiple calls for a parliamentary inquiry, even as the banks claim they're acting in customers' best interests.”

Stunning.

These have been occurring at the time when global stock markets have been treading at record highs.

And I’m quite certain that these activities have not been limited to these countries

The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom.

For redistribution to take hold, the policy of rewarding debtors at the expense of savers affects people’s outlook. These policies fundamentally change people’s incentives, and consequently, actions. And such incremental change in incentives involves the narrowing people’s time orientation (Austrian economics lingo: high time preference). When priorities have been skewed, many become vulnerable to the employment of unethical or unscrupulous means or instruments to attain their short-term agenda or interests or objectives. Or differently put, when greed becomes a priority, the propensities to speculate morphs into the propensities to swindle.

At the end of the day, greed’s nemesis will be its undoing.

Back to Mr. Kindleberger: (p.82)

“What matters to us is the revelation of the swindle, fraud, or defalcation. This makes known to the world that things have not been as they should have been, that it is time to stop and see how they truly are. The making known of malfeasance, whether by the arrest or surrender of the miscreant,or by one of those other forms of confession, flight or suicide, is important as a signal that the euphoria has been overdone. The stage of overtrading may well come to an end. The curtain rises on revulsion, and perhaps discredit

Why do volumes decline in bear markets? Answer: Because losses become the dominant force. Losses thereby spread to affect the balance sheets of speculators and investors.

Plainly stated, fear or revulsion takes on the driver’s seat.

Since the opposite side of greed is fear, while greed overwhelms today, eventually it will be fear’s turn.

 

Fanatics have been worshipping the Phisix at 8,000. But when priced from the USD that 8,000 level shrinks. Said differently, the inflation adjusted Phisix won’t be at 8,000. It would much much much lower.

Mass Delusions.

To be clear, I am not saying that the 2015 record won’t be broken. Given the intense price fixing process, whether it does or doesn’t shouldn’t be a concern. What matters will be the peso as an outlet for present policies. The Phisix hasn’t only been outclassed by the falling peso, in the context of record breakthroughs. The plight of the peso will also serve as a critical obstacle to the Phisix.That’s unless the Philippines will suffer from a hyperinflation – which is unlikely.