Gold holds strong amid changing global macros

  • 01 Aug 2023
  • Read 5 mins read

Gold as currency

Several years ago, American billionaire hedge fund manager, John Paulson, had aptly quipped, “I view gold as a currency, not a commodity. Its importance as a currency will continue to increase as the major central banks around the world continue to print money.” For thousands of years, Gold has been perceived as one of the most coveted metals and has perpetually remained relevant for investors as a popular and safe-haven asset. A widely accepted dogma that is associated with gold is its inverse proportionality with the US Dollar. That is; a falling dollar means rising gold. Ironically, in the recent past, despite the dollar being strong, gold prices were resilient and garnered interest from investors. 


Global headwinds for Gold in 2022

2022 bore witness to some of the most economically uncertain times when the wrath of the Russian invasion and fears of recession sent shockwaves across the globe. During this time, a number of countries adopted hawkish policies on their interest rates, starting with the US Fed and the Bank of England; the central banks of the US and UK respectively. However, while FDs and debt funds saw investors getting high returns, gold, which is an interest-free investment without yield or coupon, saw weak prices and was losing shine.

What helped Gold sail through rough tides?

If there is one country which investors in gold would want to thank, it would be India! Gold prices in India have continued to be traded at a premium albeit the strengthening dollar due to a weakening rupee and high customs duty on gold. Further consolidation of gold prices occurred due to the affinity of Indian households towards gold, and how its possession is considered as a sign of status in the affluent and middle segments of Indian society. Demand multiplies during festive and wedding seasons, and as per the World Gold Council, Indian households now own more than 25,000 tons of gold.

Don’t forget, Russia also had an impact

For a long time, the dollar enjoyed the exorbitant privilege of being the default trade currency. However, the US action against Russian dollar reserves sent jitters down the spines of nations holding dollar reserves. The US decision to confiscate Russian dollar reserves made other countries look at alternatives to the US Dollar as the natural reserve and trade currency. The dollar share in global reserves has fallen from 55% in 2021 to just 47% in 2022. Much of this shifted to gold, leading to a sharp spike in gold demand. Central banks added nearly 1,136 tonnes of gold last year, the highest on record. That was the big boost to gold in 2022.

De-Dollarization looks set to happen

India paying for trade in rupees or dollars or dirhams instead of dollars is a classic case of de-dollarization. This is growing rapidly, as countries are looking at their own mini arrangements to the exclusion of the dollar. As Doug Casey had rightly said, “Gold is a hedge against the idiocy of the political system, which is worldwide.” The inverse proportionality between the US Dollar and the gold will definitely bolster the demand for gold at present, given the reduction in demand for dollar. 

It remains to be seen how this paradigm shift sustains in the long run, in the absence of any alternative to the dollar. Anyways, that is good news for Gold. Rising gold demand from India and China, geopolitical tensions and dollar indifference are fueling gold prices higher.