On Thursday, March 21, world gold prices reached a new historical high. During the trading session on the New York Mercantile Exchange Comex, the price of the precious metal rose by almost 3% and for the first time in the entire period of observation exceeded $2,225 per troy ounce.
Quotes began to grow steadily the night before amid a global weakening of the dollar. Its index (DXY) against a basket of other reserve currencies fell by 0.43% on Wednesday, to 103.38 points, and in Thursday’s trading fell another 0.2%, to 103.17 points.
“The dollar and gold are competing investment assets. Both are classified as so-called safe havens, meaning investing in them is considered the safest way to save money. Therefore, as a rule, if the dollar rises in price, then the cost of gold, on the contrary, falls. And vice versa,” explained economist and director of communications at BitRiver Andrei Loboda to RT.
According to experts, the US currency has begun to fall in price on the international market as investors await changes in the monetary policy of the United States. In particular, players expect that already this year the US Federal Reserve System (performing the functions of the country’s central bank) will begin to reduce the interest rate.
“At a meeting on March 20, the American regulator left the interest rate unchanged for now, but the majority of specialists on the Federal Open Market Committee expressed the opinion that by the end of the year it would drop to 4.5-4.75% per annum. That is, investors’ expectations were confirmed that the Federal Reserve would begin to soften monetary policy. This means that the dollar index will continue to decline, and the price of gold will rise,” Sergei Suverov, associate professor at the Financial University under the Russian Government, told RT.
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Note that back in 2021, inflation accelerated noticeably in the United States. Then, quarantine restrictions introduced against the backdrop of the COVID-19 pandemic led to interruptions in the supply of a number of goods, and the Federal Reserve printed a large amount of unsecured money to support the economy, which ultimately caused an increase in consumer prices. The situation worsened in 2022, when, after the introduction of energy sanctions against Russia, the United States was faced with rising fuel prices and an even more noticeable increase in inflation.
In an attempt to curb rising prices, the Federal Reserve began to sharply tighten monetary policy (MCP). As a result, if in the previous few years the Fed rate was near zero, then from March 2022 to July 2023 the American regulator raised it 11 times - from 0-0.25 to 5.25-5.5% per annum and from has continued to maintain this level ever since. It is noteworthy that previously such a high level could be observed a little more than 20 years ago.
Traditionally, tightening monetary policy is considered one of the main tools in the fight against inflation. As a result of increasing rates, the cost of loans for citizens and businesses increases, economic activity weakens, which puts pressure on prices. At the same time, due to the actions of the Federal Reserve, the yield of American government bonds increases. As a result, the additional influx of investment into the US debt market has a positive effect on the dynamics of the dollar.
At the moment, the American regulator has managed to significantly slow down inflation, but high interest rates have complicated the work of business and began to push the US economy into recession, noted Sergei Suverov. In these conditions, a return to a loose monetary policy should help the United States revive activity in the country, but at the cost of a weakening dollar, says Digital Broker analyst Natalia Pyryeva.
“Soft monetary policy stimulates the growth of consumption and production, and due to the expansion of business activity, unemployment is reduced. At the same time, low rates allow companies to reduce the cost of servicing debt obligations, which frees up some of the funds that can be used for investment projects. All this leads to an increase in the money supply in the economy and, as a result, a cheaper dollar. Gold, in turn, acts as a traditional protective asset in conditions of money depreciation,” explained RT’s interlocutor.
Risk reduction
Over the past year, the price of gold on the world market has increased by almost 15%. One of the main reasons for the observed dynamics was the rush demand for the precious metal from the central banks of different countries, Natalia Pyryeva is sure.
“World central banks are replenishing their gold reserves due to the expectation of a gradual easing of monetary policy in the United States and the desire to reduce dependence on the dollar (mainly in Asian countries). In addition, regulators are purchasing the precious metal to diversify risks in the context of heightened geopolitical tensions in the world and record growth in the national debt of the United States,” the specialist noted.
As experts from the World Gold Council (WGC) have calculated, in 2022, global central banks purchased a record 1,082 tons of the precious metal. In 2023, the volume of purchases decreased slightly - to 1037 tons, but still remained almost twice as high as the average for the previous ten years.
Last year, the most active buyers of gold were China (225 tons), Poland (130 tons), Singapore (77 tons), Libya (30 tons), Czech Republic (19 tons), India (16 tons) and Iraq (12 tons). According to a WGC study conducted in May 2023, more and more countries are beginning to consider the precious metal as an alternative to the dollar for storing gold and foreign exchange reserves (GER).
“Our survey showed that 24% of central banks intend to increase their (gold -
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) reserves in the next 12 months. At the same time, the attitude of the Central Bank to the future role of the dollar (in the structure of gold and foreign currency reserves. -
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) became more pessimistic... On the contrary, their views on the future role of gold turned out to be more optimistic: 62% said that gold will have a larger share in the total volume of reserves,” - the report said.
According to the latest WGC estimates, in the third quarter of 2022, the dollar accounted for about 51% of the world's gold and foreign currency reserves, and gold - only 15%. However, half of the central banks surveyed expect the share of the US currency to decline to 40-50%, and some regulators do not exclude the possibility of this figure falling below 40% over the next five years. At the same time, the level of gold in global reserves may rise to 16-25% (and even higher), most central banks predict.
“Even 20 years ago, the world’s central banks kept at least 70% of their total gold and currency reserves in dollars. The massive purchases of gold observed today by regulators indicate that the role of the dollar as a reserve currency in the world has noticeably weakened,” said Andrei Loboda.
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According to Sergei Suverov, the investment attractiveness of the dollar is negatively affected by the large US budget deficit. To cover it, the American authorities constantly have to increase the national debt, the volume of which has already exceeded $34.5 trillion.
Moreover, every year debt servicing costs the US government more and more, and in 2024, for the first time, Washington can spend more on these purposes than on defense. Experts from the budget department of the country's congress came to this conclusion.
In addition, the position of the dollar on the global stage was undermined by the US desire to turn its currency into a political weapon, as previously stated by Russian President Vladimir Putin. According to him, even against the background of a record high level of national debt and the unlimited printing of new banknotes, the dollar was “the main weapon for maintaining the power of the United States in the world.” Nevertheless, attempts to use its own national currency to put pressure on political opponents, including limiting payments to Russia, became Washington’s gravest strategic mistake, Putin believes.
“As soon as the political leadership decided to use the dollar as a tool of political struggle, they attacked this American power. I don’t want to use any unliterary expressions, but this is stupidity and a huge mistake. Look what's happening in the world. Even among US allies, dollar reserves are now dwindling. Everyone looks at what is happening and begins to look for ways to protect themselves,” Putin concluded.