Raghuram Rajan on Surging Gold and Growing Risks to Financial Stability
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Hello and welcome to another episode of the Oddlots Podcast. I'm Joe Weissenthal.
And I'm Tracy Alloway.
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.
That's right. We spoke with Ragaram Rajan. He is a professor at the University of Chicago Booth School of Business and of course the former head of India's central bank. And he is exactly the person you want to talk to when everyone seems to be talking about risks in the market.
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 uh, I guess two thousand and five about brewing risk 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 uh relevant right now. So uh take a listen. Let's get started. Why is gold up so much? Let's start with the really important question. What is what is your story or theory behind this seemingly nonstop demand for gold right now?
Well, there's no single story, right? It's it's a number of stories. First, it started taking off what twenty twenty three. Clearly, there is an element of geopolitical risk. Many central banks looking at the the militarization or the weaponization of payments are basically saying, Do I want all my reserves in uh developed country currencies? Uh do I want something which I control directly? 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 the froth as everything else.
Mm. 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?
Well, uh yes, you do want to diversify your holdings. The worry about your reserve assets in developed countries being sequestered because uh 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 uh, you know, once you get beyond the big reserve currencies, you know, it's it's hard.
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