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Is the gold boom a sign of de-dollarisation?

Central bankers, beware. Credit: Getty

May 13, 2024 - 11:55am

Late last week, as central banks remained in a state of relative calm, the gold price continued to firm up. In the past, this price was firmly tied to inflation and interest rate expectations. Most gold price moves could be explained by the movement in yields on Treasury Inflation-Protected Securities (TIPS), which themselves are set in line with forward-looking inflation expectations and central bank monetary policy.

Why has the gold market changed beyond all recognition? A hint comes from the World Gold Council’s latest report, published at the end of last month. It notes that, in the first quarter of 2024, central bank demand for gold reached record highs, while the four countries with the highest demand were Turkey, China, India, and Kazakhstan.

Central banks are buying record amounts of gold as part of a long-term process of de-dollarisation. When Western countries seized Russian currency reserves in response to the invasion of Ukraine, they signalled that Western currency reserves were only trustworthy if these countries did not object to another country’s foreign policy. This has led to countries outside of the Western bloc seeking out more reliable ways to store their wealth. Gold has been a favoured alternative.

The process by which this de-dollarisation is taking place can be confusing for many. A casual reader of the business and financial press might have seen headlines which suggest that gold purchases are being undertaken due to the strength of the US dollar. But if the broader driver of the central bank gold purchases is de-dollarisation, shouldn’t the dollar fall rather than rise in value?

Not necessarily — or, more accurately, not in the short-term. For now, the US dollar’s value is set in line with the interest rate set by the Federal Reserve. The Fed is currently maintaining a high interest rate relative to most of the rest of the world, and so the dollar increases in value. Yet a stronger US currency makes American imports cheap and exports expensive, which tends to increase the trade deficit.

This is where we come to long-term drivers of the dollar’s value. The US finances its trade deficit by relying on other countries to purchase and hold dollar assets — from American stocks and bonds to simple US dollar reserves. But as we have seen, much of the rest of the world is now dumping dollars in favour of gold and other alternatives. This suggests that the supposedly strong dollar is living on borrowed time.

It also suggests that running a strong dollar policy — and hence a large trade deficit — by maintaining high interest rates in the United States is increasingly risky. At some point — perhaps amid a recession and a financial crisis — the value of the currency might drop, pushing up inflation and dragging down American living standards.

All this action has been great for longtime champions of precious metals. In the past, gold bugs, as they are sometimes called, were scorned by investment professionals. Their pronouncements of the imminent collapse of the US dollar were greeted with scepticism, and famous investors chastised those who bought gold when they could be buying stocks and bonds. “Gold gets dug out of the ground in Africa, or someplace,” Warren Buffet once quipped. “Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

But with the gold price now trading above $2,300 — record highs by any standard — and the process of de-dollarisation now being accepted as real by most investment analysts, it looks like the gold bugs are having the last laugh. Perhaps they heralded the fall of the dollar too early but, ultimately, their intuition that the US could not maintain financial hegemony forever was a sound one.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Dennis Roberts
Dennis Roberts
14 days ago

Central banks buying hold might be some of the story but I’m pretty sure tension in the middle east has a fair amount to do with the current spike.

Hugh Bryant
Hugh Bryant
14 days ago

Perhaps some investors have concluded that the growth in debt has passed the point of no return.

Rob N
Rob N
14 days ago

Interesting analysis. I have long been a minor gold bug but the Dollar, as with the Euro and other political creations and tools, has to crash, if not collapse, at some point. The only question is when and thus when to invest more heavily in gold, silver etc.

0 0
0 0
14 days ago

China sold a record amount of US Treasury bonds last month. But they aren’t piling into gold as they build trade and credit relationships designed to turn on mutual benefit instead.
That’s the trend in emerging multilateral relationships to keep your eye on.

Pip G
Pip G
14 days ago

Gold promotes strong feelings by investors: some Pro, some Con.

My pragmatic approach: I never held it during decades before 2017; but bought then as ‘insurance’, the trigger at the time being the potential for a Corbyn Communist government.

Gold is attractive as a currency holding, when fiat currencies are being debased. At times it has negative correlation to Equities & Fixed Income. It is “set and forget”.

For a long term hold in the background, but physical Gold held by a trusted non-Bank in a safe jurisdiction. Use ‘physical’ ETFs for shorter term increase/ reduction.

Paul T
Paul T
14 days ago

The clouds above my house usually arrive across the cemetery but today they are coming from the other direction; is it a sign of de-dollarisation?

Alex Colchester
Alex Colchester
13 days ago

As all grand dynasties know only too well – practice the law of thirds to preserve wealth for generations: 1/3 Land..1/3 Art..1/3 Gold.
Stocks are for the nouveaux riches. And fiat money
that’s for suckers.

David Gardner
David Gardner
13 days ago

To your list I would add equities for retirement income. It’s up to the individual to apportion the above, though I would question “art” for the average investor.

Alex Colchester
Alex Colchester
12 days ago
Reply to  David Gardner

Equities are about to enter a Great Depression that will last 10-15 years.

Martin M
Martin M
13 days ago

“….did not object to another country’s foreign policy.”
Translation – “Did not object to another country launching an unprovoked invasion of its neighbor”.

Peter B
Peter B
14 days ago

Garbage. Yet again.
“The US finances its trade deficit by relying on other countries to purchase and hold dollar assets — from American stocks and bonds to simple US dollar reserves. But as we have seen, much of the rest of the world is now dumping dollars in favour of gold and other alternatives.”
Hold on – so who exactly is buying up all the “Magnificent Seven” stocks in the US stock market ?
A substantial proportion of this is from overseas investors – people like us (through pension funds) – who are chasing the market up. UK pension funds may well have greater exposure now to these US stocks than they do in UK listed stocks (they seem to have given up actually investing in the UK market). And the UK is not alone in buying these US equities.
This “dumping dollars” thesis is nonsense.
Could it possibly be that any rise in the gold price is more a result of concerns about inflation and excessive government spending (which causes money printing and inflation) ?
Of course that doesn’t fit with the childish de-dollarisation narrative the author’s so desperate to push.

0 0
0 0
14 days ago
Reply to  Peter B

Holding US shares not the same as holding Federal bonds. Only the latter can stabilise dollar exchange, underpin US deficits and reconcile US investments abroad with credit for dollar equivalent trade as overseen by the IMF. ‘De dollarisation’ is about the unpicking of these relationships not simply who holds dollars at any time.

Peter B
Peter B
14 days ago
Reply to  0 0

The author quite specifically said “American stocks and bonds”. His words, not mine !
I’m simply pointing out the obvious fallacy in his statements here.

Pip G
Pip G
14 days ago
Reply to  Peter B

I agree that a long term reduction of the DXY ($ value against €, ÂŁ, „) is a low probability.

State banks have bought in Gold as it reduces reliance on the $. E.g China which seeks currency other than the $ for international trade. Previously they held US Treasuries e.g. Petrodollars since 1971.

As a small private investor I do not ‘hedge’ currency risk, which costs an annual fee, but rely on long term reversion to the mean.

Su Mac
Su Mac
14 days ago
Reply to  Peter B

To buy the Magnificent 7 you need to have dollars to pay for them. As stock prices rise you need more dollars pe share (not in relation to actual value anymore of course – it’s called a bubble). Also remember they’re pretty much the only thing in stocks actually going up – so drawing all the $. V distorted.
Most gold buying is by Central Banks and non-Western. When the West stops selling for profits into the rising price and starts buying it will add to this volume.
I rate Alasdair Macleod and Jim Rickards, both of whom point to the bond market as the likely breaking point of this particular debt saddled financial system and the loss of confidence in reasons to have large dollar reserves is growing.
Not too late to start stacking! 😉

Peter B
Peter B
13 days ago
Reply to  Su Mac

Of course the Magnificent Seven is a bubble right now (just my view). That wasn’t the point. The point is that a bubble on that scale can only be supported by foreign capital flows to the US.
You need to stop and ask yourself just why it is that so many foreign countries voluntarily choose to buy US assets. Even when they’re as over-priced as they are today. No one is forcing them to do so.
The answer is that this is the least worst alternative. And keeping the money in their own countries is a worse option. Do rich Russians voluntarily keep their money in Russia or spend and invest it abroad ? Likewise most other countries. The US treasury has never defaulted on its debts. Never.

Jon Morrow
Jon Morrow
12 days ago
Reply to  Peter B

The Weimar Republic never defaulted on it’s debts either. Mag 7 are being pumped by index trackers, as their share prices go up they attract more investment – earnings are not following the same way. If you sell stuff on the international market you are forced to take dollars, however, the US government has seriously dented the dollars reliability by using it as a weapon against countries like Iran and Russia – why would countries not want to find an alternative?

Su Mac
Su Mac
10 days ago
Reply to  Peter B

Quote of the day “90% of all Russia-China trade are now conducted in Ruble and Yuan. De-dollarization is not only possible but a strategic imperative. It saves money and protects sovereignty.”
President Putin and President Xi Jinping in Beijing today. They are actively working on it and saying out loud now.
You say “Of course the Magnificent Seven is a bubble right now (just my view).” I agree – but what conditions do you forsee whereby the value of the Mag 7 is not “a bubble”?
A big price drop? (Likely IMHO)
That they increase profitability to match their inflated stock value? (Unlikely IMHO)

Jim M
Jim M
8 days ago
Reply to  Su Mac

The magnificent seven is just a resurrection of the “Nifty Fifty.” That era ended as well.