Financial stability at risk

Gold has now overtaken US government bonds as the largest reserve asset held by central banks, according to the European Central Bank (ECB). By the end of 2025 US Treasuries had fallen to 22% from 25% a year earlier, while gold made up 27% of all central bank reserves, up from 20% a year earlier.

While much of this shift reflects the sharp rise in the gold price, it also points to a broader desire among some countries to diversify away from dollar-denominated assets, particularly as sanctions have made reserve holdings a more geopolitical question.

The ECB last week issued another report, one less obviously gold-connected. Its bi-annual Financial Stability Review is unlikely to be considered a must-read in the White House.

Now in its third month, the war in Iran is at the centre of this report. Its foreword says the war's "repercussions for the global economy and financial stability are becoming graver the longer it lasts." Some measures of US inflation expectations are now approaching 5% over the next year. Given the disruption to various basic commodity supplies, that may be too conservative.

Under conventional central-bank thinking, that would normally increase pressure on the Federal Reserve to consider higher interest rates from their current 3.5%-3.75% range. Higher rates can put pressure on gold, partly by supporting the dollar and making gold more expensive for buyers using other fiat currencies. But gold rarely moves for one reason alone.

Gold has lost more than $800/oz in the past three months. Although the price still is 34% higher than this time last year, people are getting itchy. Some banks are cutting their year-end gold price forecasts. Others, however, are stressing that other factors could still support the price. Such is the global nature of the gold market, no one knows for sure. No wonder the search for the next Amazon is back.

The tech factor

Technology stocks are again reaching tempting heights. Stock markets have been sensitive to the erratic peace/war signals around the Iran conflict. Yet the war is also being shrugged aside by renewed enthusiasm for the dominant US technology sector. Some analysts expect large flows of leveraged money into technology stocks over the next few years.

Some company valuations are stretching imaginations. SpaceX is reportedly preparing for a blockbuster June IPO at a valuation of roughly $1.5 trillion to $2 trillion, a level that would make it one of the largest listings in history. But speculative excitement risks overlooking that this valuation is more than 90 times sales in the last year. Much of the optimism rests heavily on Starlink, its satellite internet service, and the company’s wider technology ambitions.

Unusually, reports suggest that as much as 30% of the IPO allocation may be reserved for retail investors. Demand may be intense as investors hope they have found another Amazon.

The ECB’s report also identifies the concentration of equity markets around a handful of large US-based technology companies as a risk.

The anxiety is growing that equity markets are steaming ahead on heroic assumptions. Other AI companies, including Anthropic and OpenAI, have also been reported as possible candidates for future large listings.

The S&P 500 has surged since its October 2022 lows and is many times higher than it was in the aftermath of the 2008 financial crisis. The AI boom is not like the dotcom mania which collapsed in 2000, but that should not be seen as a comfort.

The enduring hedge

The world feels more unstable than it has for years.

One small example speaks volumes. The Iran war has removed about 30% of global helium supply. Helium is an unusual gas, but an essential one for semiconductor manufacturing. As bulk helium supply has dropped, spot prices have reportedly roughly doubled, adding another pressure point for chipmakers. Yet chip equities have continued to rise, showing how powerful the AI narrative remains even as supply-chain risks build.

Whether it is the prolonged war in Ukraine, fiscal risk, or super-inflated tech stocks, Western democracies, and confidence in their fiat money, feel vulnerable at the moment. There is an inescapable sense that perils abound.

The UK is facing political peril, with the Prime Minister under pressure from within his own party. Those jostling to take his place face a difficult prospect: many of their supporters want expanded welfare spending, but the money to support that is lacking.

Britain now spends more on welfare, including pensions, than it raises from income tax. Extra welfare spending must be paid for either by higher taxation, politically unpopular cuts, or greater borrowing. UK public sector net debt is now at levels last seen in the early 1960s.

When governments appear unable to manage debt, spending and public expectations, trust can weaken. Currencies can come under pressure when borrowing looks stretched. Markets eventually test those limits.

As governments struggle with debt and spending, gold’s long history as a store of value comes back into focus. It is not immune from volatility, but it has endured as a form of money through many periods of political and financial stress. With Glint, clients can buy, hold and spend allocated gold, using it alongside traditional currencies in everyday life.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

For US clients: Graphic representations of value are for illustrative purposes only. The Glint debt card is issued by Sutton Bank, member FDIC. The sale, purchase and storage of precious metals are offered by Glint and not Sutton Bank. Your investment in precious metals through Glint is

·        Not insured by the FDIC.

·        Not a deposit or other obligation of, or guaranteed by, Sutton Bank.

·        Subject to investment risks, including the possible risk of loss of the principal amount invested.

All investments involve risk, including possible loss of principal. The value of precious metals is affected by many economic factors, including but not limited to the current market price, demand, perceived scarcity, and quality of the precious metal. Precious metals can increase or decrease in value. Past performance is not a guarantee of future results. As such, investing in precious metals may not be suitable for everyone.