The United Kingdom has leapt up the list of Australia’s major export markets from the 11th to the 5th most important in the space of the last 12 months. It is not a Brexit-tinged fondness for its former colony that’s driving the trade, but rather fears for the future of the global financial system which are generating an unprecedented appetite for gold.

London is the world’s gold trading hub, making the UK the largest importer and one of the largest exporters of gold. The UK’s purchases of Australian gold soared from just A$1.6 billion in 2018 to A$12 billion last year. Although detailed estimates of commodity exports are only available up to December last year, total exports to the UK in the first six months of the year were up about 20% from the first half of 2019, suggesting that the surge in its gold purchases has continued.

The gold price hit a record US$2,075 an ounce in August. It has retreated since then but is holding at around US$1,950, a gain of 30% from the beginning of this year and almost 60% ahead of the level it was trading at until the middle of last year.

Demand is coming from both investors and central banks and has been more than enough to offset sharp falls in orders for the metal from the jewellery and technology industries. Over the past 10 years, the ‘real’ uses of gold for manufacturing accounted for 86% of total global demand, but according to the World Gold Council, which represents the gold industry, this plunged to just 32% in the June quarter while demand from central banks and investors surged, accounting for the balance.

After US President Richard Nixon severed the link between the value of the US dollar and the gold price in 1971, central banks became net sellers of gold. For central banks, the precious metal became an anachronism in a world of ‘fiat’ currency, where the value of currency is backed by the government that issues it rather than by an ability to convert it into a fixed quantity of gold.

Across the world, central banks sold around 7,800 tonnes of gold in the 20 years leading up to the 2008–09 financial crisis, with the Reserve Bank of Australia selling two-thirds of its 250-tonne holding. But since the crisis, they have bought back around 5,000 tonnes. The big central bank buyers have been Russia (1,780 tonnes), China (1,350 tonnes), Turkey (577 tonnes) and Kazakhstan (486 tonnes). Other major buyers are India, Uzbekistan, Poland, Mexico, Azerbaijan and Iraq.

The geopolitical argument for these central banks buying gold is a concern for financial independence, with the belief that whatever happens in international currency markets, gold holdings will be a financial safeguard. The increasing use by the United States of its control of US dollar transactions as an implement of economic coercion is likely an influence on some of these governments, although none are using gold to settle their day-to-day business.

The rise of economic nationalism has also seen central banks repatriating their physical gold holdings which have often been held for safekeeping by the Bank of England, the US Federal Reserve or the Banque de France. Central banks demanding their gold back include those of Germany, the Netherlands, Austria, Poland, Hungary and Romania.

Venezuela had been bringing its gold back from the Bank of England, but a US$1 billion shipment was stopped last year after the UK said it did not recognise Nicolas Maduro as the country’s president, but rather the opposition leader Juan Guaido. This decision was confirmed by the UK High Court in June and is expected to lead more countries to withdraw their gold holdings from the UK.

The big force behind this year’s gold rally has been investors rather than central banks. Investment in gold through exchange-traded funds has risen by US$51 billion this year, with investors buying an additional 938 tonnes of gold in the first nine months of the year. The total value of gold holdings in exchange-traded funds has risen to US$240 billion.

The biggest factor for investors is the US economy. The US Federal Reserve had been raising interest rates since 2016 but reversed course in August last year and started cutting in the face of concerns the US economy was slowing. The Fed then cut rates aggressively in March as the Covid-19 crisis struck, reducing its benchmark short-term rate to zero. It has resumed its efforts to lower long-term rates by buying both treasury and corporate bonds, effectively flooding financial markets with US dollars, and has indicated it would tolerate inflation rising above 2% before starting to lift rates. Some investors fear the flood of money-printing from the US may result in inflation jumping further and faster than the Fed expects.

The US dollar has fallen in value against other currencies since the middle of the year, with an average drop of 7.5%, as the fresh supply of dollars from the Fed exceeds demand. The renewed fall in interest rates to negligible levels means there is no longer an income advantage in holding US dollars compared with gold, while investors are looking to diversify away from the US currency.

A procession of analysts has been predicting a US$3,000 gold price, with some anticipating a loss of confidence in the Federal Reserve balance sheet while others argue that US shares are at the same dizzy level that preceded the 2000 dot-com crash and are headed for a fall. They include some respected names like the Bank of America and the Royal Bank of Canada.

For Australia, the search for safety in gold is delivering yet another benefit from the resources boom. Australia’s gold mines have lifted their output from 270 tonnes in 2014–15 to 360 tonnes in 2019–20, with further gains to 380 tonnes annually expected over the next two years. The Department of Industry expects gold exports to earn Australia $30 billion this year, ranking it third after iron ore and coal in mineral export revenue.