The global gold market is entering an important stage of development. While it is a mature market, it is still incomplete and there is room for further development.

Global macroeconomics in the post-financial crisis period can be characterised as “four highs and Four lows”; of which the “four highs” are high liquidity, high leverage, high asset price, and high risk; and the “four lows” are low interest rates, low investment, low inflation, and low growth rates. The outbreak of the global financial crisis has highlighted the shortcomings of national currencies. Time after time, central banks had to release large amounts of liquidity into the financial system in order to keep the economy afloat. While there are several reserve currencies, the global financial market is currently seeking an anchor of value.

The deflation during the Great Recession, from 1929 to 1933, resulted in the first dramatic adjustment of the global financial system and initially started the process of anchor seeking. The US Gold Reserve Act of 1934, which resulted the associated relationship between gold and the US dollar, the key currency of the world, was the first attempt to find a value anchor after the industrial revolution.

Later, Western economies entered a period of stagnation brought about by trade wars, a reduction in international trade, and the oil crisis. The US finally ended the convertibility of gold to the US dollar in 1971 – an event referred to as the “Nixon shock”, which prompted the US dollar to become a reserve currency, and for other fixed currencies to become free-floating.

The birth of cryptocurrency was another significant event in the world after 2008. Among them, the most well known is bitcoin, introduced in 2009. In 2011, it traded at 1BTC = US$0.30, and it now trades for approximately 1BTC = US$8,000, though it has reached nearly 1BTC = $20,000 in the past year. Why has the bitcoin grown so dramatically? We believe the main reason is that the market is seeking the value anchor of the currency. However, due to its various defects, bitcoin has not been able to play a more qualified role in the financial market. The advantage of gold, on contrary, is its massive consumer base and use in jewellery and a wide range of products.

Given the backdrop of inflation and financial instability, gold’s role as a value anchor has been growing. From a long-term perspective, the price of gold shows a positive correlation with the long-term M2 and M2/GDP of major global economies and its acceleration. Its trend is essentially a monetary phenomenon, which will maintain the growing attitude along with the increasing total volume of the global currency supply. According to historical data of the US economy, the average monetary growth was only 6 percent in the past 100 years, while the actual economic growth was 3 percent. The extra 3 percent the premium of gold to the dollar, which supports the role gold has been playing as the global value anchor.