The rise of gold and the fall of dollar

Pritam Singh

Professor Emeritus, Oxford Brookes Business School, UK

THE trend of rising gold prices in the last few months does not reflect the usual market fluctuations of supply and demand conditions for this ‘precious’ metal. But it signifies not only the uncertain global economic conditions but also, even more importantly, the changing geo-political world order afflicted by conflicts. The spot gold prices hit a record of $2,431.29 per ounce on April 12. The rise in gold prices has become linked to three other global changes: the rise in demand for gold reserves by Central banks, the Russia-Ukraine war and the declining reserves of dollar in the foreign currency reserves by Central banks.

When Russia invaded Ukraine over two years ago, the US-led NATO military bloc did not want to participate in a direct military confrontation with Russia because of the potentially dangerous implications for Europe, and most importantly, for Germany, the largest European economy that was critically dependent on Russian gas supplies for its energy needs. This strategy of avoidance of direct military intervention by the US is also the product of the military and political failures of past US interventions in Iraq and Afghanistan.

The Biden administration, in consultation with its key European allies, decided to use the economic weapon of sanctions to cripple Russia economically and, through that, militarily. The US froze Russia’s dollar reserves in the hope that — since dollar was the most accepted foreign currency in global trade — Russia will be isolated economically and that this isolation would create adverse domestic economic conditions in Russia and possible domestic unrest, forcing Putin to halt Russian aggression and eventually to surrender to a ceasefire acceptable to the US.

American economic and security strategists could not have imagined that weaponising the dollar would backfire. This weaponisation of currency alerted the policy strategists in all countries that had tense relations of one kind or another with the US that they could one day be subjected to dollar sanctions. This fear led the Central banks of several important countries to go on a gold-buying spree and reduce dependence on dollar reserves in their foreign currency reserves. The World Gold Council’s latest report, published in April, points out that in the first quarter of 2024, the demand by Central banks to buy gold reached record highs. Four countries that were especially noted to have led the high demand were: China, India, Turkey and Kazakhstan. No official announcement from any of these countries would suggest that they are buying gold because of their concerns about possible dollar sanctions in future, but it is obvious that substantial gold reserves in an uncertain world ensure not only safety but also a sound investment.

Given the very tense relations between the US and China especially because of their clashing strategic interests in Taiwan, the Dragon has been the most aggressive buyer of gold of late. China’s Central bank (The People’s Bank of China) was the largest official sector buyer of gold in 2023.

According to the World Gold Council, China’s net purchases of gold were 7.23 million ounces, or 224.9 metric tonnes, the highest ever purchase in a single year since at least 1977. China’s continuous 18-month gold-buying spree led to the accumulation of its gold reserves equal to 72.8 million ounces of gold by the end of April. Its value is equal to a staggering $167.96 billion. That it’s the demand by Central banks to increase their gold holdings — which has been the prime mover behind gold price rise — is also demonstrated by the fact that the demand for gold for jewellery during this period had decreased as a result of high prices.

The increasing demand for gold reserves by Central banks was accompanied by a decrease in dollar reserves. The dollar had an overwhelming dominance in global currency reserves for several decades after the Second World War. The dollar was considered the safest currency to hold. Even till the 1990s, the share of dollar in official foreign exchange reserves was 70 per cent, according to the International Monetary Fund data. This has now come down to 58 per cent of the global reserves. The attempt by US strategists to weaponise the dollar through sanctions against Russia has certainly created difficulties for some Russian citizens at home or abroad in their foreign exchange transactions, but it has failed to subdue the Russian state, which has managed to bypass these sanctions.

The India-Russia trade in rupees and roubles for the purchase of oil by India from Russia along with some aspects of Russia-China and Russia-Iran trades are some examples of bypassing the dollar. The global confidence in the dollar has been eroded, which, in turn, has diminished one key aspect of America’s source of power in the global political economy.

Though the dollar remains a strong currency, global trust in it as a reserve currency has suffered a decline. The narratives of de-dollarisation or the alternative BRICS currency floated by President Lula of Brazil — and supported enthusiastically by Russia, silently by China and hesitantly by India — along with the trend of increasing gold reserves are reflections of the declining importance of dollar as a global reserve currency and America as the most dominant global economic power.

Such epochal changes do not take place suddenly. There may even be reversals or — if Trump returns to power in the US — an acceleration of decline in America’s influence because of his blinkered vision of American isolationism couched as American nationalism.

It is not difficult to imagine that if there were to be peace in the world, gold would lose the importance it has acquired in the commodified world we live in because, as Karl Marx theorised, gold had no use value, it only had exchange value. The fetish for gold will vanish if the global community were to fully grasp the shocking level of environmental degradation caused by gold mining.

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