Bullion price, again on the rise!
View(s):In fact, on October 30 world gold price reached a historic ‘all-time peak’. The increase in the gold price has been speedy during the past 20 years, while it was less than $500 per ounce in the early 2000s.
Global financial crisis
File picture of a piece of jewellery partly wrapped with gold.
If you are interested in current world economic affairs and issues, changes in gold demand and prices are important indicators to keep tracking. These changes are often led by global economic uncertainties and speculative actions by the market players.
As we have discussed in this column on previous occasions, world gold prices were nearly doubled within five years from 2005-2009 increasing beyond $1,000 per ounce. It was largely led by speculations of the investors who anticipated the ‘US financial crisis’ in 2009.
The investors who saw the forthcoming financial crisis started shifting their investments from the stock and bond markets towards gold-holdings and other commodities such as oil as “safe-havens”. Accordingly, gold demand surged, and the gold prices rose, while oil prices and connected world food prices went up too.
The change in investor decisions as such made the global recession faster and the global financial crisis quicker. Apparently, this time too gold prices in the world are moving upward so quickly that we should not ignore it. Before we turn to the crux of the matter, let me place the issue of the global gold market in context.
Gold as an asset
Throughout the ancient times, gold has played a pivotal role as a ‘medium of exchange’ in international transactions as well as ‘store of wealth’ by wealthy people and nations. As the western nations were building their ‘nation states’ with both military power and economic power, they believed that the latter depends on accumulating a gold stock.
The UK adopted The Currency Act of 1816, legitimising gold-based currency issuance – the so-called ‘Gold Standard’ as the monetary system. The US also joined the Gold Standard by adopting The Coinage Act of 1900. The Gold Standard facilitated growing international trade and financial flows until 1944, resulting in accumulated gold surpluses in some countries. The US had the largest gold stock, which it has maintained up to now.
Gold Standard was incapable of accommodating rapidly expanding international trade and financial flows as well as domestic financial needs. It was replaced later with alternative international monetary systems and legally backed currency systems, called the legal tender.
Nevertheless, the dominant position ascribed to gold in national and international economic systems continued to remain to date. The nations continue to keep gold stocks in diversifying their reserve assets, while the private sector represented by households and investors too diversifies their asset portfolio by acquiring gold.
Buying gold
According to the World Gold Council, the world’s above-ground gold stock amounts to 212,000 tonnes as at the end of 2023. About two-thirds of it has been mined after 1950. The highest share of 45 per cent of this gold stock is in jewellery. Industry demand also accounts for 15 per cent as a raw material in specific manufacturing sectors.
The balance, which comprises gold bars and coins, is demanded by financial investors and by the central banks as reserve assets. Jewellery demand and industry demand are fairly stable and less volatile, although this type of demand has been growing steadily in response to income growth and industry expansion.
The peculier nature of the global gold demand and, hence gold price volatility, is largely due to the behaviour of investor demand and central bank holdings. If you are interested in investing in gold, there are two ways to buy gold: physical gold bars and coins or gold-backed financial instruments.
If you buy shares in gold exchange-traded funds (ETFs), you do not have to worry about handling physical gold directly or keeping it safe, because you only buy ‘shares in the ETFs’ just like shares in listed companies. In addition to ETFs, investors can also choose to buy various gold-based derivatives for investment.
Central bank purchases
The largest stock of gold that amounts to over 8,100 tonnes is with the US, followed by 3,300 tonnes in Germany. The central banks in Italy, France, Russia and China also hold gold stocks ranging from 2,200 – 2,500 tonnes.
It is, in fact, the central bank purchases of gold that appear to be outstanding in the recent past. Central banks usually hold gold as part of their reserves diversifying asset portfolio and reducing reliance on reserve currencies. While many countries tend to increase their gold holdings, the role of China, Russia and India of the BRICS countries appears to be special.
China continued to build up its gold reserves which doubled during 2015-2024 reaching 2,200 tonnes at the beginning of 2024. A similar trend is observed in Russia too, which has doubled its gold reserves during the same period, reaching 2,300 tonnes. India has also steadily increased its stock of gold reserves to over 800 tonnes by 2024 from about 550 tonnes in 2018. Turkey is another country which has become an aggressive buyer of gold. It has multiplied its gold stock five times during 2017-2024, reaching 585 tonnes at the beginning of 2024.
In fact, central banks have become the net buyers of gold in the world for more than a decade now, which got accelerated in the recent past. In effect, they have been reducing the dependence on international reserve currencies; which were the currencies? It is the US dollar.
De-dollarisation?
Out of about $11.5 trillion world reserves, 60 per cent is in US dollars and 20 per cent in Euro, while the balance is in Japanese yen, British pound, Canadian dollar, Australian dollar, Chinese yuan and others. In the recent past, countries such as China, India, Russia, Brazil and Turkey have been promoting the use of their own currencies for international payments by reducing the dependence on the US dollar.
In 2023, ASEAN too establihed a Local Currency Settlement (LCS) framework for payments within their regional bloc in reducing the role of the US dollar and strengthening their greater connectivity. A few weeks ago, at the BRICS summit held during October 22-24, Russia, sanctioned the US dollar as a “weapon” against it, and pushed towards devising an alternative international payments system to replace the US dollar.
All these evidence and new developments suggest that the post-war international confidence on the US dollar has been eroding. While emerging world economic power houses in Asia has challenged the century-old US economic hedgemony in the world. Besides, the stability of the US dollar has also been weakening internally over the years, adding fuel to the erosion of international confidence.
Uncertain future
The intensifying challenge that the US must face with is its growing public debt. Although the world had been buying the US debt and adding to the stock of their international reserves, from the US point of view debt has been growing too far. This year, the US public debt reached $35 trillion, and its interest payments over $1 trillion, while principal payments have been ‘rolled over’ with new debt every year.
To put it in simple words, the US has increasingly become an economy “living beyond its means” which is reflected through both its budget deficit and trade deficit. This is, perhaps, the major economic challenge that the US must deal with in the coming years, before the issue turns to another crisis of not only the US but also the entire world.
The world looks at it differently. By seeing the uncertain future with the US dollar, many countries would seek ways and means of altering the international payments systems and diversifying the reserve assets portfolio. The result has been the recent surge in global demand for gold and the price hike which would continue to the future as well.
(The writer is Emeritus Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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