What strong gold says about the weak $US24 Apr 2023 04:39
What strong gold says about the weak $US
Too confident in the indomitable dollar, the US saw sanctions as a cost-free way to fight Russia without risking troops. But it is paying the price in lost currency allegiances, with gold left as the main safe haven.
Today commentators overwhelmingly agree that a weakening US dollar cannot possibly lose its status as the world’s dominant currency because there is “no alternative” on the visible horizon. Perhaps, but don’t tell that to the many countries racing to find an alternative, and such complacency will only accelerate their search.
The prime example right now is gold, up 20 per cent in six months. Surging demand is not led by the usual suspects – investors large and small, seeking a hedge against inflation and low real interest rates.
The heavy gold buyers are central banks...
Instead, the heavy buyers are central banks, which are sharply reducing their dollar holdings and seeking a safe alternative. Central banks are buying more tons of gold now than at any time since data begins in 1950 and currently account for a record 33 per cent of monthly global demand for gold.
This buying boom has helped push the price of gold to near-record levels and more than 50 per cent higher than what models based on real interest rates would suggest. Clearly, something new is driving gold prices.
Look closer at the central bank buyers, and nine of the top 10 are in the developing world, including Russia, India and China. Not coincidentally, these three countries are in talks with Brazil and South Africa about creating a new currency to challenge the dollar.
Their immediate goal: to trade with one another directly, in their own coin. “Every night I ask myself why all countries have to base their trade on the dollar,” Brazilian President Luiz Inácio Lula da Silva said recently on a visit to China, arguing that an alternative would help “balance world geopolitics”.
Thus, the oldest and most traditional of assets, gold, is now a vehicle of central bank revolt against the dollar. Often in the past both the dollar and gold have been seen as havens, but now gold is seen as much safer. During the short banking crisis in March, gold kept rising while the dollar drifted down. The difference in the movement of the two has never been so large.
And why are emerging nations rebelling now, when global trade has been based on the dollar since the end of World War II? Because the US and its allies have increasingly turned to financial sanctions as a weapon.
Astonishingly, 30 per cent of all countries now face sanctions from the US, the EU, Japan and the UK – up from 10 per cent in the early 90s. Until recently, most of the targets were small.
Go gold, its about time the US$ was recognised for what it is ...a tool of US policy and hegemony
the gnome
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