Gold is the money of kings (of the East and the Middle East)

The gold rush of recent weeks does not come from private investors, if not marginally, but from central banks and the Far East: it reflects a world that is increasingly fracturing along geopolitical, cultural, economic and strategic fault lines. Demand for the yellow metal from central banks stood at 290 tonnes in the first quarter, a stronger start than any year on record. If the yellow metal has always been considered a potential source of monetary stability and economic security, today it is something more: we are witnessing new politicsof gold, governed by the global security tensions of an evolving world, reflecting the growing belief that a new political order is emerging and the geopolitical risks of the fiat currency system are increasing.

Efforts by Russia and China to ease their dependence on the US dollar are deepening the fracture in the global monetary system and have pushed the price of the yellow metal to reach $2,450 per troy ounce, a 25% increase since the start of the conflict in Middle East. In terms of numbers, China is driving the race, the Central Bank of China (PBOC) which possessed only 395 tons of gold in 2000 now has 2,262. He purchased 160,000 ounces in March alone, marking his 17th consecutive monthly purchase. China's overseas purchases of physical gold fell 30% in April compared to March due to record prices. Gold's share of its total foreign exchange reserves rose to 4.3% while at the same time the PBOC reduced its holdings of US bonds from 44% to 30%.

Chinese consumers are also increasing their investments in the yellow metal to protect their savings in a volatile stock market, with a depreciating yuan and a real estate crisis whose end is still not clearly in sight. The China Gold Association reports that purchases of gold bars and coins increased by approximately 27% in the first quarter of 2024, reflecting consumers' search for “golden protection”.

Chinese gold production increased by 21% to 139 tonnes in the first three months of the year but around 53 tonnes were produced with imported minerals, highlighting Beijing's dependence on foreign countries in this sector too. According to the World Gold Council, Russia is now the second largest global gold producer with 324.7 tonnes in 2023, behind China with 374 million tonnes. Globally, primary gold production is expected to grow to around 3,045 tonnes in 2024 compared to 2,893 in 2023. The forecast is also confirmed to grow for 2025, to over 3,125 tonnes, and up to almost 3,175 tonnes in 2026.

But access to the primary metal will become increasingly complicated with the emergence of resource nationalism among exporting countries: recently the Prime Minister of Papua New Guinea (PNG), James Marape, proposed two bills that would create a National Gold Corp. with monopolistic control over the refining and marketing of mined gold. A phenomenon that enters into that category of ongoing seismic waves, which are overturning everything we have known for 30 years and where the ones paying the price, this time, will be mining companies such as the Canadian Barrick Gold and the American Newmont Corp. which will see their contracts will be abruptly interrupted while for the country the result will be to drive away foreign direct investments.

While Chinese demand is one of the reasons supporting gold prices, and global risk aversion sentiment is fueling demand, what marks a significant break with the past is that this rush is taking place in a context of higher interest rates and a strong US dollar. Traditionally, neither of these two conditions has been a prerequisite for the growth of the price of the yellow metal. Higher US Treasury yields, thanks to delays in interest rate cuts, failed to curb gold's rally and thus the inverse relationship between the US dollar and gold broke down.

The seizure of Russian foreign assets, $600 billion frozen by the West, has provided a further boost to the perception of many states that investments in US dollars are no longer safe. As a result, those countries that are not directly part of the American alliance system are now looking for alternatives driven by concerns about the risk of sanctions. The Central Bank of Turkey has accumulated gold for 10 consecutive months, purchasing 30 tons during the first quarter and bringing its reserves to 570 tons. The Reserve Bank of India also purchased 19 tonnes in the same period and other countries, albeit to a lesser extent, also increased their purchases: Kazakhstan, Singapore, Oman and the Kyrgyz Republic.

A recent study by the International Monetary Fund (IMF) confirms the tendency of foreign exchange reserve managers to increase gold reserves to protect themselves from economic uncertainty and geopolitical risk, including sanctions. Trade restrictions have more than tripled since 2019, while financial sanctions have expanded and the geopolitical risk index has seen a surge since 2022. But above all it makes one reflect how the IMF has reversed 46 years of hostility towards The “gold standard” welcoming Zimbabwe's introduction of ZiG, short for Zimbabwe Gold, the country's new gold-backed currency backed by 2.5 tonnes of bullion held at the central bank.

Nothing new, in 2022, Russia pegged the ruble to gold: 5,000 rubles were worth one ounce of the yellow metal. Peg the currency to the gold standard by the largest natural gas producer and third largest oil producer globally has offered other countries around the world an alternative option. This has allowed Russia to sell energy at discounted prices and find an alternative to Western energy markets while managing to support the approximately 16,000 strategic sanctions issued by some of the most powerful economies in the world. Maybe it was worth thinking about before that billions and billions of dollars of Russian gold would be traded freely, the United Arab Emirates imported 96.4 tons of Russian gold in 2022 alone. avoiding those sanctions.

Of course, there is also the flip side, and while the World Gold Council claims that gold is the safest place to invest in times of conflict, its price rises and falls like anything else. This is why Putin's goal of pegging the ruble to gold must be evaluated for what it is: rather than a brilliant move, it is the only possible alternative. Certainly as long as the dollar increases, Putin's strategy works, and the real risk of the Western countermeasure of causing the price of gold to collapse with a massive sale by central banks could lead to negative effects for the dollar too.

Should we therefore expect imminent de-dollarization? Diversification, which is actually happening, is a slow process because no other currency is able to step in to fill the void. The dollar represents around 60% of global foreign exchange reserves and handles over 85% of international transactions, but importantly this percentage is only slightly lower than in 1989, and is a testament to the resilience of the greenback. With all due respect to all those, more and more, who want their savings to be something that governments cannot print and who see no better asset than the yellow metal that has been at the service of protecting wealth for thousands of years.