27 September 2024
Gold has been rising in US dollar terms but since April of this year has remained relatively stable or within a trading range when priced in BRICS and Global South currencies. To understand why, we need to understand the causes of dollar weakness and the attractions of gold in times of uncertainty.
As I interpret this graph, the price of gold in dollar terms is going up, on its way soon to $3,000, some say.
This while the dollar, as measured against a basket of currencies (DXY), is weakening. This would likely be due to falling interest rates, But equally with the death of 35 trillion and interest payments Of over a trillion a year this cannot instill confidence in lenders Who were likely to ask for a greater risk premium, surely.
Notice the decline since April this year. Gold, which pays nothing, becomes more attractive - this was the moment when rate cuts began to be talked about seriously. Also the time when the BRICS started talking about creating some alternative reserve currency and began moving towards de-dollarisation in their trading, especially after the geopolitical shifts caused by the Russia-Ukraine war.
Normally, currencies follow the dollar: 70-80% of int.l contracts are written in USD and staying more or less pegged keeps income and expenses in balance and avoids importing inflation. But we can see that the currencies of some countries of the global South are decoupling. Same against sterling.
Maybe their central banks, for the reasons we know about, are buying gold instead of dollars, as a place to store their surpluses. This would reduce their dependence on the dollar. Rising commodity prices and moves up the value chain into refining could also be expected to strength and their currencies.
For countries that buy gold, priced in dollars, and are decoupling, this means gold is effectively cheaper, encouraging more purchases, raising demand.
The United States is using the world's reserve currency (70-80% of int.l contracts are written in USD) as a tool of foreign policy. Countries taking this coercion as an infringement on their economic sovereignty would be looking at alternatives.
Having said that, in times of uncertainty from inflation or geopolitical tensions, these same countries would still seek a refuge in the dollar for some stability and certainty.
So while the dynamics of falling US rates, inflation and global uncertainty are driving up the price of gold in dollar terms, the impact on currencies of the BRICS nations is different. The weakening dollar offsets the rise in gold prices, keeping the price of gold in local currency terms relatively stable, in a trading range. This is the case since April, when talk of reducing interest rates began, even though it appears to be hitting all-time highs in dollar and sterling terms.
Conclusion
So while gold has surged in US dollar terms, this has not been mirrored in many BRICS and Global South currencies. The relatively stable prices in these currencies can be explained by stronger local currencies, better inflation control, and reduced dependence on the dollar. The turning point around April 2023 seems likely tied to shifts in both US monetary policy expectations and global de-dollarisation trends.
