(Kitco News) – The ongoing gold price rally represents a dire warning for the future position of the U.S. dollar in international markets, according to Mohamed El-Erian, Former CEO of PIMCO and current president of Queens’ College, Cambridge.
“I think the gold issue is really important,” El-Erian said in an interview with Bloomberg on Wednesday morning ahead of the FOMC rate announcement. “You've heard me argue here [that] people cannot escape the dollar as a reserve currency, but they can start slowly doing two things. One is building pipes around it, and two, changing the asset allocation to include a little bit of other things. And gold is one of the other things.”
“This should be flashing yellow in Washington here, that if gold continues to go up, regardless of all this, it's broken down all its historical correlations,” he added. “There's something going on about the dollar internationally, and that's something that they have to take really seriously.”
El-Erian said he’s watching the ongoing shift away from the dollar and into alternatives like Bitcoin.
“You see, suddenly crypto has become more acceptable institutionally, which was unthinkable just two years ago,” he said. “You see the dollar. You see investors now saying ‘Diversify away from the U.S., diversify away from the U.S.’ Whether it's the household sector, the corporate sector, or the sovereign wealth funds, they're all looking for an alternative.”
“The good news for the U.S. is you cannot replace something with nothing,” he added. “There is no other currency that steps in, and that's why that shift is going slowly. But we don't know where the critical point is, and that's why the U.S. has got to be careful.”
El-Erian was also unpacking the implications of Wednesday afternoon’s Federal Reserve announcement. In an X post on Thursday morning, he wrote that “market analysts are looking to reconcile two interpretations of where the Fed is in terms of its policy thinking based on the usual sequence of FOMC material followed by Chair Powell’s press conference.”
“The first interpretation is based on the trifecta of the FOMC statement, the revised forecasts, and the interest rate guidance,” he said. “It stresses uncertainty and has the Fed in a wait-and-see mode.”
“The second is based on the Chair’s remarks at the Press Conference,” El-Erian wrote. “It focuses on his repeated downplaying of tariff-related inflation (including the use of the word “transitory”), implying that high inflation would not prevent rate cuts should growth weaken.”
“This combination of more hawkish FOMC material and a more dovish press conference is not new,” he pointed out. “It has tended to be a feature of this Fed.”
El Erian has been one of the key voices sounding the alarm about gold prices and the broader implications of the global gold rally. On Oct. 21, he penned an op-ed in the Financial Times arguing that Western countries should pay more attention to the rise in gold prices, as the precious metal’s persistent rally reflects increasing interest in alternatives to the dollar-based financial system.
“Something strange has happened to the price of gold over the past year,” El-Erian said. “In setting one record level after the other, it seems to have decoupled from its traditional historical influencers, such as interest rates, inflation and the dollar. Moreover, the consistency of its rise stands in contrast to fluctuations in pivotal geopolitical situations.”
He said that gold’s ‘all-weather’ price increase indicates the presence of something that goes beyond short-term economic, electoral, and geopolitical developments. “It captures an increasingly persistent behavioural trend among China and ‘middle power’ countries, as well as others,” he said. “And it is a trend that the West should be paying greater attention to.”
“Some may be tempted to dismiss gold’s performance as part of a more general increase in asset prices that, for example, has seen the US S&P index gain about 35% in the past 12 months,” he said. “Yet that correlation itself is unusual. Others will attribute it to the risk of military conflicts that have seen so many innocent civilians lose their lives and livelihoods, together with massive destruction of infrastructure. Yet the price journey suggests that there may well be a lot more going on.”
El-Erian pointed to consistent bullion purchases by central banks as a significant driver of gold’s strength. “Such buying seems not just related to the desire of many to gradually diversify their reserve holdings away from significant dollar dominance despite America’s ‘economic exceptionalism,’” he wrote. “There is also interest in exploring possible alternatives to the dollar-based payments system that has been at the core of the international architecture for some 80 years.”
“Ask why this is happening and you will normally get an answer that mentions a general loss in confidence in America’s management of the global order and two specific developments,” he said. “You will hear about America’s weaponisation of trade tariffs and investment sanctions, together with its reduced interest in the rule-based, co-operative multilateral system that it played a pivotal role in designing 80 years ago.”
“What is at stake here is not just the erosion of the dollar’s dominant role but also a gradual change in the operation of the global system,” he wrote. “No other currency or payment system is able and willing to displace the dollar at the core of the system and there is a practical limit to reserve diversification. But an increasing number of little pipes are being built to go around this core; and a growing number of countries are interested and increasingly involved.”
El-Erian said that the current gold price rally is “not just unusual in terms of traditional economic and financial influences” but it also surpasses strict geopolitical influences to capture a broader phenomenon, which is building secular momentum.”
As these alternative pathways for international finance develop and grow, they could cause a fragmentation of the global system and an erosion of the power of the dollar and the U.S. financial system. “That would have an impact on the US’s ability to inform and influence outcomes, and undermine its national security,” he said.
“It is a phenomenon that Western governments should pay more attention to,” El-Erian concluded. “And it is one where there is still time to course-correct, though not as much as some would hope.”
