Why Gold Will Continue to Shine in 2025 and Beyond

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by Jan Nieuwenhuijs, Money Metals:

Gold’s strong performance over the last two years must be seen as an acceleration in the deleveraging of the global financial system. After many decades of inordinate credit creation—leading to excessive debt levels, asset bubbles, and too much monetary interdependence between nations—the financial system has started to heal itself through a rising price of gold.

The gold price will continue to rise in the years ahead until stability is restored.

Increased trust in credit instruments since the Second World War has inflated the global financial system to startling proportions. Rising geopolitical tensions, the debt overhang, and inflation are now undermining this trust, leading to a new balance between financial instruments with counterparty risk (credit) and without counterparty risk (gold) in favor of the price of gold (deleverage).

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Before we dive into the data that shows the price of gold can easily double in the coming years, let’s begin with some theory.

The Hierarchy of Financial Instruments

Simplified, the economy can be divided into the financial system—consisting of financial instruments such as money, stocks, bonds, and derivatives—and goods and services.

What distinguishes financial instruments from goods and services is that the former have no “use-value” to us humans. We can wear a sweater, eat a sandwich, ride a bicycle, and hire a contractor to paint our house. That’s why goods and services are often referred to as the real economy.

Financial instruments are a means to an end. Because of their intermediary role, the value of financial instruments depends on trust. We accept money for the work we do because we trust we can use it the next day to buy bread at the bakery. People invest in stocks because they trust the economy will grow and companies can increase profits. And so forth.

But not all financial instruments are created equal. There is one asset that has zero counterparty risk because it’s not man-made: gold. All other financial assets are a form of credit but differ in degree of creditworthiness. These differences make up the hierarchy of financial instruments.

Exter’s inverse pyramid is an excellent framework to capture the hierarchy of financial assets and model the financial system, with the aim of understanding debt cycles. By extension, the model works as a long-term gold price indicator, as the price of gold commonly rises at the end of a debt cycle.

Graph 1. My version of Exter’s inverse pyramid<sup>1</sup>. The pyramid’s horizontal axis is a about quantity and leverage. Its vertical axis is about quality and trust. Note that in moderation there is nothing wrong with credit</em><em>, but too much of it will choke off the economy and too little means foregone opportunities.

Graph 1. My version of Exter’s inverse pyramid1. The pyramid’s horizontal axis is about quantity and leverage. Its vertical axis is about quality and trust. Note that in moderation there is nothing wrong with credit, but too much of it will choke off the economy, and too little means foregone opportunities.

At the bottom of the pyramid sits gold, which is scarce, universally accepted, and has no counterparty risk because it’s no one’s liability. Trust in gold is rock solid because it has an unbeatable 5,000-year track record as a store of value.

Above gold in the pyramid is national currency, which is a form of credit as it’s a liability of a bank2. Credit requires more trust to function than gold, and the higher up the pyramid the riskier the credit instrument. Following national currency are debt securities, equity, and finally derivatives.

Gold is at the bottom of the pyramid and ultimately backs all forms of credit resting on top of it. Hence, virtually all central banks own gold.

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