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

In Defiance of the Philippine Treasury Markets the BSP Kept its Policy Stance; Bank Consumer NPLs Rebounds in Q3; From the "Powell Pivot" to the "BSP Pivot"

So, why haven’t financial conditions tightened? How have markets been able to counter Fed tightening measures? Because the system has avoided de-risking/deleveraging. Leveraged speculation, the marginal source of marketplace and system liquidity, has been undeterred by Fed rate hikes. Risk embracement has persisted, holding risk aversion and associated tightening at bay—Doug Noland 

 

The holiday season means we shift to a holiday mode.  So, blog postings will resume in the 3rd week of January 2024. (Unless something urgent or interesting comes up!)  

 

Many thanks for visiting and patronizing this blog.   

 

Have a Merry Christmas and a Blessed, Joyous, and Healthy 2024! 

 

In this issue 

In Defiance of the Philippine Treasury Markets, the BSP Kept its Policy Stance; Bank Consumer NPLs Rebounds in Q3; From the "Powell Pivot" to the "BSP Pivot" 

I. Two Reasons Why the BSP Defied the Treasury Markets 

II. BSP: "Inflation Leans Significantly to the Upside," Treasury Markets See Disinflation 

III. Evidence: Inflation Leans Significantly to the Downside  

IV. Asymmetric Policies Redux: BSP Defiance Anchored on Subtle Liquidity Operations: Bank QE and Household Credit 

V. Critical Areas of the Economy Exhibiting Substantial Slowdown 

VI. The "Too Big to Fail" Banking System  

VII. Consumer Strains Emerge: Credit Card, Salary Loans, Motor Vehicle, and Real Estate Loans Rebounds in Q3! 

VIII. The "Powell Pivot" as a Ground for the "BSP Pivot" 

 

In Defiance of the Philippine Treasury Markets, the BSP Kept its Policy Stance; Bank Consumer NPLs Rebounds in Q3; From the "Powell Pivot" to the "BSP Pivot"

 

The BSP kept its policy rates unchanged and remained at odds with the Philippine Treasury markets even as signs of economic slowdown and disinflation spread. 

I. Two Reasons Why the BSP Defied the Treasury Markets 

 

Defying the markets, the BSP held on to its policy rates last week. 

 

Here are their two reasons: 

 

BSP, December 14, 2023: The BSP The balance of risks to the inflation outlook still leans significantly toward the upside. Key upside risks are associated with potential pressures emanating from higher transport charges, increased electricity rates, and higher oil prices. Meanwhile, the impact of a relatively weak global recovery as well as government measures to mitigate the effects of El Niño weather conditions could reduce the central forecast. At the same time, the country's medium-term growth prospects remain firm, with strong demand expected in the fourth quarter due to sustained consumer spending and improved labor market conditions. The BSP will also continue to monitor how firms and households are responding to tighter monetary policy conditions alongside evolving domestic and external economic conditions. (bold mine) 

 

Two propositions justifying the BSP's position: supply side and strong economy.  

 

First, the BSP remains adamant about inflation representing a supply-side dynamic.  

 

Second, inflation is a natural outcome of strong demand, hence, the economy. 

 

Huh?  

 

So, supply-side disruptions have spurred extraordinary strength in demand?  By their logic, authorities should continue to throw barriers to the supply side to "boost demand," which should translate to "economic growth!" 

 

See the conflicting claims from such gibberish? 

 

Then, the BSP added that they would monitor the household's (and firms') response to the tight monetary policy. (How about San Miguel’s 1.4 trillion debt?) 

 

If demand is a consequence of productivity growth, why bother? 

 

The opacity from their drivel represents an attempt to conceal the mounting fragility of household's (and the economy's) balance sheet conditions in response to the BSP's policies. 

 

Nonetheless, let us examine some of their claims. 

 

II. BSP: "Inflation Leans Significantly to the Upside," Treasury Markets See Disinflation 

 

The BSP claimed: "Inflation leans significantly to the upside."  

 

Figure 1 

 

The Treasury markets firmly disagree.  They see disinflation instead.  

 

This week, while T-Bills yields rallied to regress to the pre-CPI level, they have hardly reversed a substantial portion of the deficit from the recent dive. (Figure 1, topmost chart) 

 

Besides, T-bills have been overbought, so the rebound signified a reflexive response.  

 

What's more, with the drop in yields of notes and bonds, the Philippine Treasury curve flattened anew to indicate more tightening. (Figure 1, middle graph) 

 

Remember, the BSP (and the consensus) NEVER saw the inflation shock/crisis and had been compelled to respond forcefully.  

 

In contrast, the treasury markets had consistently been ahead of the BSP. (Figure 1, lowest window) 

 

Here is the thing.  Should falling T-Bill rates persist, the BSP will not only "pivot" with incremental cuts.  Instead, they're bound to chase the markets with panic cuts.   

 

Our bet is with the Treasury traders. 

 

III. Evidence: Inflation Leans Significantly to the Downside  

 

The government's data also exhibits the unfolding widespread and predominant disinflation process.   

Figure 2 

 

The PSA's general wholesale and retail price indices have resonated with the CPI’s downdraft. (Figure 2, topmost graph)  Consumer boom?

 

The slowdown in bank manufacturing loans resonates with the downdrift in the Producers Price Index (PPI). (Figure 2, middle pane) Manufacturing boom?

 

Despite the bounce in universal commercial bank loans to the industry last October, the PSA's Construction Materials retail and wholesale prices have also been southbound. (Figure 2, lowest chart) Real estate and construction boom?

 

IV. Asymmetric Policies Redux: BSP Defiance Anchored on Subtle Liquidity Operations: Bank QE and Household Credit 

Figure 3 

But there have been signs of improvement in liquidity conditions.  Despite the BSP rates at multi-year highs, exploding household credit growth has contributed to the expansion in money supply represented by cash and M3. (Figure 3, topmost chart) 

 

That's aside from the unprecedented injections by banks to the government through the Net Claims on Central Government (NCoG), which was up 19% YoY in October.  (Figure 3, middle window) 

 

Ironically, despite the assertion that the BSP is tightening, industry or supply-side credit improved in October (7.6%), which led to an increase in universal commercial bank’s aggregate credit (5.9%). (Figure 3, lowest graph) 

 

Once again, this exhibits the asymmetric policies embraced by the BSP.  

 

Though headline CPI has cooled, credit expansion and liquidity support remain robust in subtle and less noticeable areas of the economy, which explains the BSP resistance.   

 

The thing is, should the money supply growth rate accelerate past double digits for a considerable time, expect a turnaround in the CPI (with a time lag). 

 

V. Critical Areas of the Economy Exhibiting Substantial Slowdown 

 

Several crucial segments of the economy have shown signs of emerging weakness.  

 

Figure 4 

 

Though media have cited the contraction in exports, imports, and total trade last October, the more notable segment has been the plunge in Semiconductor exports and the sustained deficit in capital goods imports.  

 

Weakening microchip exports, which accounted for 44% of the total, could signal the deterioration in the global economy.  (Figure 4, topmost diagram) 

 

And while consumer goods imports have risen 4.8% YoY, its nominal USD data appear to be plateauing—portentous of reduced consumer demand. (Figure 4, middle graph) 

In the meantime, the weak capital goods import dovetails with the FDI (see below). 

 

Manufacturing data exhibited significant softening in October, with value and volume growth plummeting from 8.9% and 9.1% in September to 1.3% and 1.7% in October—a possible confirmation of the PPI.

 

Tourism (DOT) data have also exhibited symptoms of "peaking," where nominal foreign arrivals showed sparse improvement last November.  But because of the base effect, YoY changes remain amplified. (Figure 4, lowest chart) 

 

Reduced foreign arrival or inflows mean that the rapidly expanding accommodation and food services would increasingly depend on demand from local tourists—whose recent spending spree has been financed by credit. 

 

October's employment data, supposedly on multi-year highs, masked the surge of the non-labor force and underemployment segments, which were far bigger than the growth of the employed, discussed here.   

 

Figure 5 

Despite promises of foreign investments from the leadership's numerous foreign travels (junkets), the BSP's FDI data remains sullen, with substantially lower inflows last September and in 9 months.  Depending on how one looks at the chart, FDI flows have been in a downtrend since the 2021 spike or from 2016. (Figure 5, topmost chart) 

 

How would there be growth without investments? 

 

There you have it, the unfolding disinflationary process supported by several signs of frazzling economic conditions betokens a substantial slowdown in the Q4 NOMINAL GDP.  The headline GDP will now depend on how fast the deflator (implicit index) falls.   

 

In the same plane, the revenue growth of listed companies could exhibit more slackening from signs of demand attenuation. 

 

The BSP's facade only increases the chances of a sharp deterioration of the economy or the financial sphere that could compel them to reverse their position rapidly.    

 

At any rate, regardless of the BSP's official stance, that’s a when and not an if. 

VI. The "Too Big to Fail" Banking System  

 

Another BSP concern: "...monitor how firms and households are responding to tighter monetary policy."  

 

Why these? 

 

The banking system has been undergoing a dramatic transformation in its business model.  

 

First, they've focused on consumers rather than the supply side.  

 

Second, banks have become primary financiers of the government's deficit historic spending via NCoCG.  

 

Last, entwined with the second, banks have also committed more resources to investment assets, hence the record Held to Maturity assets (HTM). 

 

We were supposed to discuss this on a bank-focused post, but the lack of time pushed us to defer.  

 

In any case, we shall focus on the FIRST model. 

 

The share of universal commercial bank lending to consumers (ex-real estate) has risen to an All-Time high last October!  All. Time. High.   (Figure 5, middle diagram) 

 

More critically, the banking system has become the primary liquidity provider of the financial system.   Banks have been monopolizing the nation's Total Financial Resources!  They now control 82.8%!  All. Time. High.  (Figure 5, lowest graph) 

 

The BSP's EZ money regime has benefited banks at the expense of non-bank financials and the capital markets.   

 

Banks have also become "TOO BIG TO FAIL," which explains the Php 2.2 trillion liquidity injections in 2020-21. 

 

VII. Consumer Strains Emerge: Credit Card, Salary Loans, Motor Vehicle, and Real Estate Loans Rebounds in Q3! 

 

Last September, I warned about the coming deterioration of the consumer balance sheet. 

 

Consumers have filled the gap of their income's loss of purchasing power through increased balance sheet leveraging.  Of course, this increase in demand powered by credit unfilled by supply leads to "too much money chasing too few goods" or inflation!   

 

And so, the vicious feedback loop of borrowing to address higher prices, which results in higher prices, and vice versa.  

 

          … 

 

The bank's gamble with consumer spending may be about to backfire.  

 

As of Q2 2023, though the growth of non-performing loans (NPL) salary loans has stalled, stagflationary conditions are likely to push it higher. (Figure 1, middle pane) 

 

NPLs of credit cards appear to be bottoming.  Likewise, stagflationary conditions are likely to accelerate this ratio. (Figure 1, lowest graph) [Prudent Investor, September 2023] 

 ___

Nota bene: the BSP's pandemic relief measures included provisions that allowed banks leeway in various reporting requirements. (C&G Law, May 2020)  As such, banks were able to disguise a considerable number of losses.  It is not clear whether the BSP has lifted these measures.  

 

Well, here it is.   

 

The data indicated below are the consumer loans and NPLs in pesos (billions).  Due to the lack of space, we omit their share of the various benchmarks such as total segment, aggregate loans, etc.  

Figure 6 

In any event, despite the relief measures, non-performing loans of credit cards, salary, motor vehicles, and consumer real estate have rebounded. The momentum is likely to pick up speed as the economy decelerates. (Figure 6) 

 

So, aside from the real estate sector, consumer and consumer-related loans represent the "Achilles Heel" of the banking system.  

 

Because banks are "Too Big to Fail," once credit and liquidity falter fast, the BSP won't just be panic-cutting rates; they are likely to incorporate the Pandemic bailout template of another monumental multi-trillion peso liquidity injections, combined with increased relief measures coupled with another historic blowoff in deficit spending.  

 

By then, the USD Peso will pierce through the Php 60 level like a (hot) knife through butter! 

 

VIII. The "Powell Pivot" as a Ground for the "BSP Pivot" 

 

Finally, after sustained insistence of "higher for longer," US Fed Chair Jerome Powell's much anticipated "Pivot" sent global capital assets into a stream of speculative frenzy, which, if sustained, could mean a floor on global inflation (with a time lag).    

 

However, after using the US Fed as a pretext for its incumbent stance, we can expect our local monetary officials to use the "Powell Pivot" to rationalize the domestic "BSP Pivot." 

 

From a speech of the newly appointed BSP Chief Eli M Remolona, Jr last August: 

 

We need these reserves because, we think, the world will slow down next year and in the following years, especially [because] of what the Fed has done. As you know, the Fed has tightened so aggressively that it is bound to slow down not just the US economy but also the rest of the world. This poses risks to us and other emerging markets because financial accidents could happen (Remolona, 2023) 

 

Since the markets, via people's time preferences, not the BSP or central banks, are supposed to set rates, determining the "natural rate" signifies an exercise in futility.  Excessive policy looseness or tightness would only foster imbalances. 

 

We end this post with a quote from Austrian economist Dr. Frank Shostak on central bank tightening, 

 

Tight interest rate policies restrain economic bubbles, which emerge from low interest rate policies that encourage banks to lend money not backed by savings. Easy money policies divert money from wealth generators toward speculative bubbles, while a tightening of the policy tends to arrest this trend and set an economic bust into motion. The greater the proportion of all economic activities that are bubbles, the larger the bust will be. 

 

Leaving more wealth at the disposal of wealth generators is a good thing, but when the central bank raises interest rates, it tampers with financial markets and falsifies interest rate signals. This in turn raises the likelihood that businesses will misallocate resources, weakening wealth generation and contributing to the severity and length of an economic bust. (Shostak, 2023) 

 

Expect the "Powell Pivot" to shape the "BSP Pivot!"  Brace for its repercussions. 

___ 

References 

 

Bangko Sentral ng Pilipinas, Monetary Board Maintains Policy Settings, December 14, 2023, BSP.gov.ph 

 

Prudent Investor, Why is the Philippine Banking System Burning Cash at a Rapid Rate? The Escalating Systemic Risks from Bank Financialization September 17, 2023 

 

Gatmaytan Yap Patacsil & Protacio (C&G Law), BSP Grants Relief Measures to Manage the Financial Impact of COVID-19…Approves Acceptance of Additional Eligible Credit for Rediscounting, et.al, Rajah & Tann Asia May 2020 

 

Eli M Remolona: Rising to the challenge - the Bangko Sentral ng Pilipinas, Bank for the International Settlements, August 14,2023  

 

Dr. Frank Shostak, Why the Fed's Tight Rate Stance Damages the Economy, September 13, 2023, Mises.org