Gold and the Chestnut Tree

As I stood underneath the trees, I couldn't figure out what was causing so much commotion high above me. Hidden beneath the dense canopy, all I could hear were objects striking the ground around me. We assumed it must be birds building nests, dropping the occasional twig in the process. This went on for weeks and, if anything, the activity only intensified. It couldn't possibly be pigeons with such spectacularly bad aim.

Then one afternoon I was hit by something rather more substantial than a twig. I picked it up. Roughly a quarter of an inch long, brown with lighter patches and unmistakable teeth marks. Suddenly, it occurred to me that I had been standing beneath a row of enormous chestnut trees. The constant shower was simply the discarded remains of a feast as an army of squirrels gorged themselves in delirious delight.

What does that have to do with the price of gold? More than you might think. On the face of it, gold finding support at $4,000 after its precipitous fall from $5,600 makes remarkably little sense. Higher yields increase the opportunity cost of holding gold, jewellery demand has fallen to its lowest level since 2020, institutional investors have been reducing exposure through gold-backed ETFs, and the meme traders are busy donating money elsewhere. Ordinarily, that combination would have sent gold considerably lower.

Instead, central banks have quietly continued to buy throughout the correction, absorbing much of the selling. Not because gold looks cheap or they expect lower interest rates, but because they are trying to solve a different problem: diversifying reserves and reducing dependence on the US dollar. In other words, behaviour that appears random only seems that way because we have misunderstood the incentive. Once you realise that squirrels are simply trying to get fat ahead of winter, everything begins to make perfect sense.