The return of gold to a role in the global monetary system is a marker to watch for the new year. That, at least, is what we take from the news that central banks are buying gold at levels not seen in, the Financial Times reckons, 55 years. That date certainly caught our attention. For it was then, in the late 1960s, that the Bretton Woods system — a gold exchange standard — was buckling under America’s spending on guns and butter. 

The coup de grâce for the Bretton Woods system finally came in 1971, when President Nixon closed the Treasury’s gold window at which foreign governments had been able to redeem their greenbacks at a 35th of an ounce of gold. That default ushered in the age of fiat money, meaning money with no definition in law nor backed by specie, such as gold or silver. The debased dollar is now valued at less than an 1,800th of an ounce of gold.

So does “the flight of central banks to gold,” as the FT puts it, signal that the world’s central banks see the error of abandoning sound money? The last time gold was bought at this pace, the FT says, it “marked a historical turning point for the global monetary system.” Then, Europe’s central banks were buying “massive volumes of gold from the US,” prompting “the collapse of the London Gold Pool of reserves.”

That collapse “hastened the eventual demise” of Bretton Woods, the FT says. Today, the surge in gold buying reflects, a gold researcher tells the FT, a “geopolitical backdrop” of “mistrust, doubt, and uncertainty,” triggered in part by the sanctions regime imposed by the West against Russia after its invasion of Ukraine. As a result, central banks “don’t want to be reliant on the US dollar as their main reserve asset,” one analyst tells the FT.

It’s no surprise, then, that much of the gold buying is being done by Russia’s central bank, which has been hardest hit by the sanctions, along with Communist China. Turkey and Qatar, too, are among the chief buyers of gold. Some of the gold purchases are being made sub rosa, the FT reports, with analysts speculating that Middle Eastern governments, via sovereign wealth funds, “are using fossil fuel export revenues to buy gold.” 

It’s too soon to tell, as the FT sees it, “whether record central bank buying”of the precious metal  is “opportunistic,” taking advantage of a dip in gold prices, or “a more structural shift.” Yet we can’t help but notice that the wave of gold buying is coming at a time when central banks across the globe are struggling to tame a wave of stimulus-fueled inflation that is proving resistant to the standard tactics in the Keynesian kit. 

In America, to take one case, the Fed’s drive to reverse the spiral in prices has yet to make much headway. Since March the central bank has boosted interest rates to levels last seen 14 years ago, popping asset bubbles and throwing housing markets into disarray. Inflation, though, has been prancing at a little over seven percent, higher than it’s been since President Reagan and Paul Volcker quashed the last inflationary wave in the early 1980s.

So it also wouldn’t surprise us if central bankers, as they toss and turn at night, are starting to wonder whether the inflation we’re seeing today results from our monetary system itself — or lack of one.  In that context it’s easy to see the logic of buying gold, which, as in the economic expansions of the 19th century and the Bretton Woods era, has historically proven the surest way to ground the value of currencies while keeping inflation at bay.