U.S. dollar decline has been in the news a lot lately, and that’s what this article is going to examine. But gold has been one of the biggest financial stories of the year.
Gold climbed 35%, to nearly $2,800 per ounce, from the beginning of the year to early November.[1] Silver has done well, too, with an even-more-impressive 43% rise over the same period.[2]
Gold also has been resilient long-term, which means it’s not just a situational hedge. From the time central banks began their big push to fight inflation in early 2022 through early November 2024, gold rose 53%[3]. That makes it one of the best performing assets of the last three years.[4]
Since the beginning of the millennium, gold rose about 900%.[5]
And all this value from what is basically a rock.
There has been a great deal of discussion about why the yellow rock has remained so durable.
One reason mentioned often is central banks’ increased demand. Central banks have been net buyers of gold since the financial crisis of 2008. And now they’re at record highs.[6] They buy it as a store of value and inflation hedge, as a hedge against geopolitical risk, because of its lack of counterparty risk, and due to declining interest rates.[6][7][8]
Now, some observers are saying de-dollarization, though it has been on the list as a minor reason, could be a much larger source of gold’s energy than they initially thought.
Respected economist Mohamed El-Erian is one such analyst who thinks de-dollarization should be looked at more closely as a reason to own gold.
He says factors such as climate, geopolitical disharmony, and other common catalysts of gold just aren’t enough to explain the metal’s upward momentum in recent years.
“Something strange has happened to the price of gold over the past year,” he said.[9]
As he puts it, gold has been rising – as much as 40% so far this year – without consideration for variables like the level of inflation and interest rates, relative dollar strength, or the current geopolitical landscape.
“Gold’s ‘all-weather’ characteristic signals something that goes beyond economics, politics and higher-frequency geopolitical developments,” El-Erian-said. “It captures an increasingly persistent behavioral trend among China and ‘middle power’ countries, as well as others. And it is a trend that the West should be paying greater attention to.”[10]
He dismisses the idea that gold’s surge could be due to asset prices going up. In fact he said it may be that gold’s success is like the tide that lifts the boats.
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The de-dollarization influence on gold, says El-Erian, comes in two forms:
One is foreign central banks seeking “to gradually diversify their reserve holdings away from significant dollar dominance despite America’s ‘economic exceptionalism.’”[11]
The other is pursuit of “alternatives to the dollar-based payments system that has been at the core of the international architecture for 80 years.”[12]
El-Erian believes the reasons central banks and nations want to move away from the dollar and toward gold have to do with the growing mistrust of the U.S. and its oversight of the dollar-based financial order that has existed since World War II ended.[13]
Where does the mistrust come from? Among other things:
- America’s weaponization of trade tariffs and investment sanctions[14]
- Roughly half of Russia’s foreign exchange reserves frozen by the West[15]
- Russia’s ability, in spite of the frozen assets and roughly 16,000 sanctions, in large part because of its gold reserves, to bypass the dollar and continue to trade and grow its economy[16][17][18]
- Russia’s work for more than a decade to isolate its economy from transactions requiring American dollars[19]
According to El-Erian, the implications of this suggest potentially profound and lasting changes for the worldwide dollar-based system…and gold.
De-dollarization May be Contributing to a “Change in the Operation of the Global System”
It used to be that “de-dollarization” and a global move away from the U.S. dollar as the primary reserve currency were topics only discussed by those who subscribed to conspiracy theories.[20][21]
But things have changed. The U.S. has now targeted one-third of all the world’s nations with sanctions.[22] This is clearly pushing some nations to seek alternative mediums of exchange.[23]
Also, the U.S. hasn’t been managing its own fiscal house very well, with national debt reaching $36 trillion and rising $2 trillion to $3 trillion each year. The nation's annual budget deficits are now in the trillions.[24]
“What is at stake here,” says Mohamed El-Erian, “is not just the erosion of the dollar’s dominant role but also a gradual change in the operation of the global system.”[25]
(See more details in the full Augusta Precious Metals article – link at the top of this page.)
Central Banks Expect Gold to Rise and the Dollar to Continue Suffering
According to the World Gold Council’s 2024 Central Bank Gold Reserves Survey, it’s clear that a majority of the world’s central banks expect gold’s share of global reserves to increase through at least the next five years, just as they expect the dollar’s share of reserves to decline over the same period.[26]
In other words…if the de-dollarization movement continues, gold could play a significant role as a replacement for the dollar in international transactions.
What does all this mean for individual investors? It’s unclear what will happen in actuality. But there are signs that the global monetary system might just be becoming more focused on gold.
Individual retirement savers who have pulled the trigger on gold IRAs see all these things happening, including the U.S. dollar decline, and it’s a confirmation that they made the right decision. Because, now in addition to owning a tangible asset that can work as a hedge and diversifier, they see how they might benefit from gold returning to a global prominence. It’s just one more reason to own it.
For details on what's happening, read the full article here.
Citations:
[1] CNBC.com, “Gold COMEX (Dec′24)” (accessed 10/31/24).
[2] CNBC.com, “Silver COMEX (Dec′24)” (accessed 10/31/24).
[3] CNBC.com, “Gold COMEX (Dec′24).”
[4] StockCharts.com (accessed 10/31/24).
[5] Ibid.
[6] World Gold Council, “2024 Central Bank Gold Reserves Survey” (June 18, 2024, accessed 10/31/24).
[7] Ibid.
[8] Filip De Mott, Business Insider, “3 reasons why surging gold prices will climb another 8% by the end of 2025, Goldman says” (October 31, 2024, accessed 10/31/24).
[9] Harry Dempsey and Mary McDougall, Financial Times, “Gold’s mystery rally baffles analysts” (March 12, 2024, accessed 10/31/24).
[10] Mohamed El-Erian, Financial Times, “Why the west should be paying more attention to the gold price rise” (October 21, 2024, accessed 10/31/24).
[11] Ibid.
[14] El-Erian, “Why the west should be paying more attention”; Portfolio Visualizer, “Asset Class Correlations” (accessed 10/31/24).
[15] El-Erian, “Why the west should be paying more attention.”
[11] Ibid.
[12] Ibid.
[13] Ibid.
[14] Ibid.
[15] Elena Fabrichnaya and Guy Faulconbridge, Reuters.com, “What and where are Russia’s $300 billion in reserves frozen in the West?” (December 28, 2023, accessed 10/31/24).
[16] El-Erian, “Why the west should be paying more attention.”
[17] Ibid.
[18] Robert Huish, The Conversation, “Vladimir Putin’s gold strategy explains why sanctions against Russia have failed” (March 18, 2024, accessed 10/31/24).
[19] Ibid.
[20] Mike Maharrey, Forex.com, “De-dollarization is not just a wild conspiracy theory” (March 11, 2024, accessed 10/31/24).
[21] Michael Fleming, Federal Reserve Bank of New York, “Has Treasury Market Liquidity Improved in 2024?” (September 23, 2024, accessed 10/31/24).
[22] Jeff Stein and Federica Cocco, Washington Post, “The Money War: How four U.S. presidents unleashed economic warfare across the globe” (July 25, 2024, accessed 10/31/24).
[23] Stein and Cocco, “The Money War”; Anshu Siripurapu and Noah Berman, CFR.org, “The Dollar: The World’s Reserve Currency” (July 19, 2023, accessed 10/31/24).
[24] FiscalData.Treasury.gov, “Debt to the Penny” (accessed 10/31/24); CBO.gov, “An Update to the Budget and Economic Outlook: 2024 to 2034” (June 2024, accessed 10/31/24).
[25] El-Erian, “Why the west should be paying more attention.”
[26] World Gold Council, “2024 Central Bank Gold Reserves Survey” (June 18, 2024, accessed 10/31/24).