Gold is up by more than 30% since the low it made on 5 October 2023 and up by 17% since the start of the year (as of May 17 – see Exhibit 1). A good performance for an asset with no yield. It does not seem to matter whether real rates rise or the US dollar appreciates, precious metals are resilient.
A long-standing hedge against geopolitical risk
The status of gold as a haven is not in question. [2] In the space of barely a month (February 2024), geopolitical tensions — the conflicts in Ukraine and the Middle East — helped drive a nearly 7% increase in gold prices. This move illustrates the role gold can play to protect holders against geopolitical risk. Of course, gold as a hedge is not just a 2024 phenomenon; it has been confirmed by academic studies highlighting that only gold and silver appreciate when international tensions rise. [3]
Bringing gold reserves home
In the first quarter of 2024, appetite among emerging market central banks for gold remained strong. Purchases reached 290 tonnes, the highest amount in a single quarter since 2000. [5] A new development is central banks ([4] Nigeria, South Africa and Saudi Arabia [5]) increasingly repatriating their gold reserves from the Federal Bank of New York. [4]
Since the freezing of the Russian central bank’s dollar holdings in 2022, several central banks in emerging countries have been rebuilding their gold reserves and repatriating their stocks of gold. In addition, China is no longer accumulating US dollar reserves and is gradually selling off its holdings of US Treasury bonds.
Losing an appetite for US dollar, Treasuries
In our view, this phenomenon underscores a growing distrust of the US dollar and the end of the investment of petrodollar revenues in US Treasuries.
Developments among the BRICS+ countries (the group of nine fast-growing countries that account for nearly half of the world’s population, 27% of nominal GDP, 42% of oil production, and 38% of natural gas production) are important. If they favour bilateral agreements in local currencies as an alternative to the dollar, a common currency pegged to a basket of assets including commodities could emerge, especially since these countries are the main producers of hydrocarbons. Other integration projects are underway such as the creation of a rating agency and the issuance of local currency bonds by the New Development Bank. [6]
A new world order
Free trade, geopolitical stability, and a safe and cheap supply chain characterised a unipolar world centred on the US. Since COVID, the forces of globalisation appear to be ebbing. A new ‘multipolar’ dynamic is developing involving de-dollarisation, deglobalisation and international tensions.
This new framework benefits precious metals. They appeal to investors as they provide a hedge against both the risk of an erosion of purchasing power in US dollars and geopolitics.
Demand for gold from central banks is not weakening and the repatriation of their gold reserves from the US suggests a rising mistrust of a US-centric system. However, both individual and institutional investors (asset managers, private banks) would appear to be underinvested: despite the high gold price futures positions are below previous peaks as are the assets of the biggest gold ETF. This situation suggests the end of the rise in gold is not yet in sight.
Looking further ahead, were a common currency pegged to a basket of assets including commodities to emerge in the BRICS+ countries, it could be a new catalyst for a further rise in gold prices.
References
[2] Gold as International Reserves: A Barbarous Relic No More? (imf.org)
[3] Journal of Banking & Finance Vol 117, August 2020- Hedging geopolitical risk with precious metals https://rpc.cfainstitute.org/en/research/cfa-digest/2020/12/dig-v50-n12-1
[6] Rise Of BRICS Bloc Continues Through Expansion [Infographic] (forbes.com).
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