Raghuram Rajan on Surging Gold and Growing Risks to Financial Stability

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

And I'm Tracy Alloway.

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

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'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, I guess, 2005 about brewing risks to the financial system. So, 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 your story or theory behind this seemingly nonstop demand for gold right

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 demilitarization 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

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, 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, you know, once you get beyond the big reserve currencies, you know, 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 h