Patrick: Welcome to the Barclays Brief podcast. If you tuned in for episode one, welcome back. And if you're here for the first time, great to have you with us. The idea of this podcast is simple. Each week, we bring you differentiated insights from our experts across both Barclays Research and our Global Markets division. So think about one theme, one specialist, 10 minutes of clarity.

I'm Patrick Coffey from Barclays Research, and in the last few weeks, colleagues across the bank have been fielding lots of incoming questions from clients on gold. So let's find out what on earth is going on with the price of gold. And particularly the question I want to learn about is, ‘is the surge in the price of gold signalling an increasing distrust in the established fiscal and monetary order?’

Patrick: I'm thrilled to be joined by my colleague Ajay Rajadhyaksha, chair of Barclays Research. Ajay, thanks for being here today.

Ajay: Hey, Patrick. Good to be here. You know, decades ago, as a little kid in Mumbai, I remember my grandfather telling me to always buy only two things. One was property. The other was gold. Let's just say grandpa would be a happy man today.

Patrick: I'm sure he would be. And, I'm very happy that you're here, Ajay. Very excited to get into it. It is the 13th of October and as we're speaking, the price of gold is outperforming markets once again. So there's lots to discuss. But let's just start with the basics. I thought gold is meant to be an inflation hedge.

And I thought gold was meant to go up lots when other things were going down. But why are investors buying gold now?

Ajay: It's a great question. Historically, as a hedge, as a sign that they don't believe that the people in charge will do the right thing. That when things go to pot, when currencies keep getting debased, gold will be the one thing that holds its value.

But, and I think this is what you're getting at, Patrick. There's no question that the buyer base has widened a lot from just the fringe element in recent decades.

Patrick: Yeah, it's suddenly widened. The price of gold has gone up massively. You know, it's just smashed through $4,000 an ounce, is up over 20% in two months, over 60% in the past year, and over 120% in the last three years. So what's driving that rally?

Ajay: Demand, supply and then yes, there's fear. But look, let's do the demand side first. Central bank demand for gold has jumped sharply from 2022, not coincidentally after the West froze Russian FX reserves. The share of gold in global FX reserves is now more than the share held in US treasuries. But you know the weird part, Patrick?

Even as the price of gold has gone up 150% in five years, the amount of new gold mined has only risen about 10%. Rising production costs, fewer new discoveries, geopolitical headaches - all of these are reasons. And then, of course, in the last year, retail investors are getting involved. Inflows into gold ETFs have exploded in recent months. And that I think is the fear factor you mentioned finally showing up.

Patrick: Exactly. Now I'm interested in supply. I'm interested in demand. But I'm particularly interested in fear. I was reading your research note last week, and you argued that gold's rise may be signalling unease with the fiscal and monetary order. Can you just lift the curtain on that for our listeners?

Ajay: Right, so I'm going to pick four economies, large ones, developed economies and walk you through them. The US, the UK, France and Japan all have large debt loads. Very large. Their fiscal profiles are still worsening. Inflation in most is still not a target, but most importantly, there's virtually no political appetite for fiscal consolidation. In Japan, the new LDP leader is talking about new stimulus. France is on its sixth Prime Minister in less than two years. The country still cannot pass a budget. And in the United Kingdom, the Labour government has struggled even with a large parliamentary majority, to make even small cuts in spending. The US has benefited a little bit from tariff revenues, true. But the longer-term US fiscal profile still shows debt to GDP worsening. And of course, on the monetary side, FIAT currencies have taken a real beating from inflation in the last few years. All of these things I think are showing up in gold.

Patrick: Okay. So what you're effectively saying is increase in the gold price, which is being significant, is a signal to policymakers about that concern around the fiscal profiles in those large countries and elsewhere. But let me just push back. Let me just push back on that for a moment Ajay. The gold price is simply a function of supply and demand as you said, and the rise in the gold price is simply a catch up to its fair value. Our FX strategists have shown that in their gold model, they note they published just two weeks ago so where am I wrong in that analysis?

Ajay: Where you are wrong, Patrick, is that two things can be right at the same time. So yes, gold has benefited from post-Covid inflation. There is an element of catchup, but my God, this is now a five-year bull market. It is not six months, not 12 months. Gold's been going up for the last five years and it is definitely signalling an unease about the global financial order as well. It's not just gold, it's silver too. Silver is up 75% this year. Yes, there's a short squeeze. All of those things matter from time to time. But the sustained nature of the rally in precious metals, if policymakers don't see this as a problem, I think it's because they are choosing not to.

Patrick: Ok, help me understand that a bit more. You mentioned this isn't just about the gold rush, and obviously silver surged as well. But Bitcoin's rallied. So is this just asset rotation or is it a deeper signal of distrust in the FIAT regime?

Ajay: It's the latter. It's a deeper signal of distrust in FIAT regimes. Because usually, you know, when you have asset rotation, it's something you mentioned right at the start of this conversation. Gold and silver do well usually when equities are doing badly. So it's not like people are moving out of equities into gold and silver. That's not what is happening. I also Patrick, quickly want to distinguish between crypto and hard metals. On Friday when President Trump threatened 100% tariffs on China, equities at their worst day since April. You know what Bitcoin did? It had a flash crash. Meanwhile, gold and silver kept going right on up.

So yes, I think there is a distrust in FIAT regimes. But precious metals for now seem the one consistent hedge against currency debasement.

Patrick: Understood. So Ajay you mentioned that post-Covid we've seen this huge increase in gold. The biggest drivers of that price have been inflation and central bank buying. So how should we think about gold versus equities right now?

Ajay: You shouldn't. You know we think of equities along normal metrics: Price to equity multiples, earnings power, etc. Look let me flip the question back. Gold struggled between 2011 to 2018. I don't recall anyone coming up to me and saying, oh look, equities are so rich against gold. That's not how it works. So now we don't think equities are cheap, mind you, but Big Tech in particular has so much earnings power that I would worry if I see a large pullback on the earnings side coming. I would not conflate these two asset classes at all right now.

Patrick: Okay. And Ajay you obviously listened to our first episode with Ronnie Wexler, talking about his bullish perspective on US markets. And we've got this surging gold price. Can the two coexist at the same time?

Ajay: Ah, they can. One asset classes much smaller than the other,  let's not forget that. But I hear where you're going. It is true that gold and silver both look extremely overbought on technical indicators right now. I mean, you don't go parabolic in an asset class without some pullback from time to time. We might well get one. But Patrick, that’s a pause until governments get their house in order. And that really doesn't seem likely in the foreseeable future. There's going to be a role for gold in portfolios.

Patrick: Ajay, thank you so much for joining me today. Based on what I've just heard, here's a few things I'm walking away with. Firstly, gold as a hedge. That's pretty well understood. But today it's different. The gold price is rallying despite healthy financial markets. Secondly, the recent increase in the gold price could be signalling an increasing distrust in the established fiscal and monetary order. And finally, precious metals like gold could play an important role in investors’ portfolios for years to come.

Thanks so much for listening to the second episode of the Barclays Brief podcast. Do subscribe wherever you're listening, and if you're a Barclays client, you can explore more differentiated views, data and analysis on Barclays Live. And while you're there, check out Ajay's latest piece called “What Is Gold Signalling?”