Raghuram Rajan on Surging Gold and Growing Risks to Financial Stability

SPEAKER_2 (0:02)

Bloomberg Audio Studios, podcasts, radio, news.

Joe Weisenthal (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:23)

And I'm Tracy Alloway.

Joe Weisenthal (0:24)

Today, listeners get a special live episode of the podcast that we recorded in Washington, DC at the annual meeting for the Institute for International Finance.

Tracy Alloway (0:33)

That's right. We spoke with Raghuram Rajan. He is a professor at the University of Chicago Booth School of Business, and of course, the former head of India Central Bank. And he is exactly the person you want to talk to when everyone seems to be talking about risks in the market.

Joe Weisenthal (0:49)

That's right. Of course, and we bring it up in the conversation, he was sort of famous for being one of the early people to warn in, I guess, 2005 about brewing risks to the financial system. So we talked about what's behind the surge in gold, what's going on with central banks, and how seriously they're taking inflation, speculative fervor and frenzy in the market, all of the things that are relevant right now. So take a listen. Let's get started. Why is gold up so much? Let's start with the really important question.

What is your story or theory behind this seemingly nonstop demand for gold right now?

Raghuram Rajan (1:24)

Well, there's no single story, right? It's a number of stories. First, it started taking off, what, 2023 Clearly, there is an element of geopolitical risk. Many central banks looking at the militarization or the weaponization of payments are basically saying, do I want all my reserves in developed country currencies? Do I want something which I control directly? So a movement to gold for that reason may have started initially, a lot of central banks moving to more gold. But there are other reasons. I mean, what's the safe asset today? If you look around the world, certainly, if you look at Japan, you know, huge amount of debt, probably higher inflation than in the past, and interest rates really low. Is that a place you want to put a lot of money in? The euro area, well, it's always been a question of whether it's a cohesive unit, who's going to bail the system out when there's a problem? And of course, the United States running large fiscal deficits, you know, till the eye can see. So you know, a lot more questions about safe assets today. And that's the second feature. Third, of course, interest rates coming down, gold is easier to hold at that point. A bunch of reasons why this is happening. I would say at this point also that there is a fair amount of froth. So you can't completely discount the fact that gold prices are probably moving along with froth as everything else.

Tracy Alloway (2:55)

Was this something that was on your radar when you were at the RBI, head of the RBI? How did you think about reserve diversification then?

Raghuram Rajan (3:03)

Well, yes, you do want to diversify your holdings. The worry about your reserve assets in developed countries being sequestered because of an angry president or prime minister wasn't as big a concern. But there was definitely a view that you needed some diversification. And once you get beyond the big reserve currencies, it's harder to deal with the smaller countries. Gold is not liquid. That is a problem. It sits on your balance sheet. But if you want to transform it into something, it's sitting in your vaults. How do you convince the others that it's a lot of countries have their gold in New York or in London. There, it's a question of moving from one vault to another. But if it's in your home country, it's harder. You need to rent a 747 to take it elsewhere.

Joe Weisenthal (3:52)

Yeah, I was telling to someone last night who pointed this out, you know, there's this for a long time, the price of gold could sort of be modeled or linked to real rates in some way. And there was this sort of nice stable relationship. And they pointed out, you know, if you really look at when the divergence occurred, it was not long after Russia's invasion of Ukraine. And of course, the seizure of Russian assets, which fits into what you're talking about, which is that if you are a reserve manager at a bank or whatever, did that wake people up to the possibility that your fiat currency that is in some foreign central bank or some foreign entity could just disappear one day in a way that your own custodied gold cannot?

Raghuram Rajan (4:32)

I think it did. I think that's a strong reason. You see the movement starting in 22, 23, it starts picking up more strongly. But it's also the willingness to weaponize a lot of stuff. As you know, a number of countries are trying to build alternatives to Swift because Swift can be weaponized. Now, these need not be your traditional sort of quote unquote rogue countries, which have been on the list of sanctions for a long time. This could be any country which fears political change. I mean, if Canada can turn out to be antagonistic to a close neighbor, what about a country 5,000 miles away? So trust has broken down in the system. That's part of the reason why people are trying to build alternatives, which don't make them dependent. Payments are so crucial. You don't want to be dependent on any one country that can change the nature of payments.