Another BRIC in gold's wall
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(Kitco News) - There are plenty of reasons to be bullish on gold: a global banking crisis, an impending recession, and persistently higher inflation. Now, we can also add the demise of the U.S. dollar as the world's reserve currency.
Okay, rumors of the U.S. dollar's death might be premature, but there is definitely a growing trend that the world is moving towards a multi-currency financial system. China and Russia are leading the charge to create an internationally recognized yuan and results are starting to bear fruit.
This past week, China announced that it settled its first Liquid National Gas trade in yuan through the Shanghai Petroleum and Natural Gas Exchange. At the same time, China and Brazil inked a deal to conduct trade and financial transactions in the natural and yuan, cutting out the U.S. dollar.
In other de-dollarization headlines, Former Goldman Sachs chief economist Jim O'Neill, the person who coined the term BRICS -- representing Brazil, Russia, India, China and South Africa -- said that the trading bloc should expand and challenge the dominance of the U.S. dollar.
"The U.S. dollar plays a far too dominant role in global finance," he wrote in a paper published in the Global Policy journal. "Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the value of the dollar and the knock-on effects have been dramatic."
The idea of the world diversifying away from the U.S. dollar has been around for years, but the trend picked up significant momentum in the past year as Western nations have tried to punish Russia for invading Ukraine.
Led by the U.S., Russia was kicked out of Society for Worldwide Interbank Financial Telecommunications, or SWIFT system, and its economy has been crippled by harsh economic sanctions. Some nations have described the West's actions as a weaponization of the U.S. dollar and a new style of "aircraft carrier diplomacy" to dictate foreign policy objectives.
Meanwhile, other nations, less conspiratorial, have a more practical need to diversify away from the U.S. dollar. Many emerging market nations have their debt denominated in U.S. dollars and when the greenback is strong, these nations have a much more significant debt burden.
Last year, the U.S. dollar index hit its highest level in 21 years, nearly causing a sovereign debt crisis in emerging markets that would have spilled over into the global financial system.
In an interview with Kitco's Ernest Hoffman, Peter Grandich, founder of Peter Grandich and Company, noted that emerging markets that relied on cheap money will continue to suffer.
"There are two things that are dead, globalization and the great credit expansion in the world," Grandich said. "It'll be more challenging for certain countries that were very dependent on flows because a market was really strong. I don't see any major country where I want to run and put a lot of money in at this time."
Reflecting Grandich's sentiment, many analysts have said gold will continue to be the biggest winner as the world diversifies away from the U.S. dollar. We have already seen proof of this.
|Why investors need to own gold in this banking crisis: There is always more than one cockroach in the kitchen - David Rosenberg|
In 2022, central banks primarily bought a record 1,136 tonnes of gold to diversify their foreign reserve holdings. While this year might not set another record, analysts expect central banks to continue buying gold en masse.
For many analysts, this buying has completely transformed the gold market, creating a solid floor, as prices have held support well above $1,900 an ounce this past month. Because of these "strong hands" in the marketplace, investors are starting to see real value in the precious metal.
But it's more than just geopolitical uncertainty that is supporting gold. The precious metal remains an attractive safe haven as the world deals with a global banking crisis.
Although tensions in the banking sector have eased, they have not gone away. In an interview with Kitco News, David Rosenberg, founder of Rosenberg Research, warned that "there is always more than one cockroach in the kitchen."
Rosenberg said that investors need to own bonds and gold in this environment.
But that's enough for this week. Have a great weekend.