Gold Price Rising Alongside Dollar as China, BRICS Seek Safe Haven
The gold price continues to rise alongside the U.S. dollar as foreign nations look to end dollar hegemony.
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Gold had an excellent year in 2024, closing up 25%. As of today, it is already up 10% in one month — not too shabby for an asset claimed to be boring.
It has outperformed the S&P 500 index which is barely up about 3%, the Magnificent Seven stocks and the Nasdaq for that matter. Ordinarily, gold tends to do well when there is a chance of a recession or a slowing down of the U.S. economy, making it a pure safe haven asset. But the U.S. economic numbers are coming in quite robust, so what does gold know that is causing it to break away from its traditional relationships?
We all know the U.S. debt story and how stretched it is, looking back at any metric going back to World War II. The U.S. has been on a spending spree for decades, but the last four years that trend has been exacerbated. Today, U.S. national debt stands at north of $36 trillion with interest expense alone around $1 trillion with rates where they are. There is no way that the U.S. will be able to pay this debt down, nor will our children, unless the government starts to get GDP going again. That is where AI comes in, eventually. But for now, the only other alternative is to lower rates, which Trump wants to do so desperately, but the Fed cannot give in as inflation is still not close to its 2% target, and we already saw the tantrum the bond market threw at the back end of 2024 when it did.
The Fed has a dual mandate concerning inflation and the labor market. The labor market and the economy has remained quite resilient despite all the odds over the past few years and with the Fed raising rates so aggressively in 2022, a recession was almost certain last year, but it seems like one never came. This is because the Fed has been playing a very delicate game of balancing inflation risks and providing liquidity in the markets at times of extreme stress. Truth be told, the bar to cut rates is a lot lower than the bar to raise rates, hence the Fed put. The labor market has been softening, but the unemployment rate has been averaging around 4.1%, which is not an alarming level. But if this were to weaken enough, the Fed would be compelled to act.
Another very strong tailwind has been the constant foreign countries buying up gold since the Ukraine war, especially China, as they want to diversify away from U.S. reserves.
China is one of the biggest buyers, as the last two years have seen China purchase more than 2,800 tons of gold from overseas locations, which, according to Bloomberg, is more than all the metal that backs exchange-traded funds (ETFs) around the world or about a third of the stockpiles held by the Fed. The People's Bank of China (PBoC) announced the addition of 10 tons of gold in December 2024, its second consecutive monthly purchase. This pushed China's official gold holdings to 2,280 tons, 5.5% of total foreign exchange reserves and 44 tons more than the end-of-2023 level. This is the new world order, where the goal of the BRICS is to de-dollarize as quickly as possible. It may take a while, but the writing is on the wall.
This week, as Trump surprised the world with aggressive tariff proposals on Canada Mexico and China, and as the DXY spiked, gold was actually up. One can only imagine what gold will do once the dollar does start to fall when the Fed does start to cut rates. As they say, never short a boring market.
At the time of publication, Bengali had no positions in any securities mentioned.
