Is gold anchored?: Mike Dolan

For investors who buy gold as a bastion of stability, it should give pause that one of the biggest buyers of gold bullion in recent months is a lock on the hyper-speculative world of crypto.

The narrative surrounding the record-breaking surge in gold prices – to date it has risen by 56% by 2025 – typically centers on concerns about fiscal dominance, high public debt, loose money and a loss of confidence in once-hard currencies.

But what’s also important is who actually makes all the purchases?

Until recently, the policy focused on central bank reserve managers in China and developing countries. Some of them are still unnerved by the freezing of Russian dollar and euro assets by Western countries after Russia invaded Ukraine in 2022. Coupled with sizable private purchases and strong inflows into exchange-traded gold funds, a “flight to safety” narrative emerges.

What almost went unnoticed was that other big buyers until the middle of this year were Tether, the issuer of the US dollar-pegged crypto token, or stablecoin USDT and the small gold-backed token Tether Gold XAUt.

Investment bank Jefferies calculated that gold purchases from the world’s largest digital asset companies now exceeded the central bank’s official purchases over the two quarters to September 30.

On that date, Tether held 116 tons of gold for its customers — about $14 billion at current prices. This makes it the largest single holder of gold bullion outside of major central banks, and puts it on a par with smaller bullion holders in countries such as South Korea, Hungary or Greece.

TONS AND TETHE

The skyrocketing increase in gold prices this year occurred in two waves. The first was a surge of nearly $1,000 an ounce in just four months, which peaked in April around the tariff shock and coincided with a 10% decline in the dollar. The second, another $1,000 jump between mid-August and mid-October, occurred without further dollar weakness.

The central bank was still the biggest loser, with aggregate purchases of around 220 tons in the second and third quarters. But marginal buyers appear to have a huge impact.

As the Jefferies team points out, the second stage of the rally was marked by a rapid increase in Tether gold purchases: about 26 tons in the third quarter alone, or about 2% of total gold demand and about 12% of known gold purchases by central banks. In the second quarter, Tether accounted for about 14% of central bank purchases.

“Logged gold demand is likely to tighten supply in the short term and impact sentiment, which in turn may encourage speculative flows,” the bank concluded, adding it expects more demand on that scale.

As for whether this level of buying can continue, the report details that Tether appears to be buying gold for two coins.

For the largest dollar-backed coin, USDT, which had a total circulation of $174 billion at the end of the third quarter and about $184 billion as of Nov. 17, the percentage of gold reserves may have increased over the past six weeks.

At last count, Tether reported having 104 tonnes of gold as part of its USDT reserves, and another 12 tonnes backing XAUt.

This is not in accordance with the new US law. The landmark GENIUS Act in July, which created a new regulatory framework for the expanding world of stablecoins, explicitly prohibited compliant issuers from using gold as a reserve asset. Tether has flagged plans for a GENIUS-compliant stablecoin called USAT that will use no gold at all.

What is less clear is why after the Act was passed, Tether piled up the amount of gold bullion backing USDT. And spot gold prices have remained weak since hitting a record $4,379 in mid-October – currently more than 6% below that.

DESCRIBING ‘HEAVEN’

A broader intertwining of the gold and crypto ecosystems makes ideological sense. The theme of oversupply and a decline in the value of major currencies appears to be driving demand for both currencies, with buyers claiming to be hoarding both for ‘store of value’ reasons due to limited supply compared to fixed income.

But in practice, they behave like very different animals.

Crypto tokens, like bitcoin, may have exploded in popularity over the past decade, but they remain highly volatile and largely speculative.

Recent price movements underscore this point. Even as this year’s jitters over major currencies shifted to the Japanese yen in the fall, bitcoin followed a classic “risk‑off” on technology stocks, losing about a third of its value in six weeks.

While this may seem typical of crypto tokens in general, the math around stablecoins is different. Their value proposition rests on a digital dollar that is fully supported and instantly redeemable.

But periodic bouts of severe stress on crypto remain a fact of life. If, for whatever reason, demand for stablecoins falls sharply, pressure will inevitably fall on the assets backing the designation – which now includes sizable gold deposits.

Jefferies expects further gold demand from the stablecoin world. Many others may be drawing darker conclusions: crypto vagaries may now have plunged ‘safe-haven’ gold into highly speculative highs and lows as well.

For those who have been buying gold to avoid debt bubbles or technology or something else, now they may need to ask whether gold has become like a bubble in the process.
Source: Reuters