The demand for gold is largely driven by wars and a global reaction against the US dollar’s hegemony, particularly in China. The word itself has an ancient appeal. This year, yellow gold has reached record values of $2,400 per troy ounce; the glitter has a shine that transcends the accountants’ banal supply and demand matrices.
It’s the volatile, war-mad global geopolitics of today at work. Stated differently, a major portion of the worldwide demand for gold can be attributed to conflicts and the reaction of nations, particularly China, against the US dollar’s hegemony.
It might surprise readers to learn that China is not only the world’s largest consumer of gold, but also its largest producer of the precious metal.
As the Chinese economy has collapsed due to decreasing manufacturing and housing prices, money has moved and discovered a new path that is paved with gold.
According to media estimates, Chinese consumers of gold jewelry have climbed by an astounding 10% this year, and their purchases of gold coins and bars have soared by an even more astounding 30%.
However, geopolitical motivations have been the true driving force. China is shifting away from the dollar, and its central bank has been buying gold nonstop for the past two years. Beijing sees a larger role for gold in its holdings going forward.
The US dollar’s hegemony gives the country tremendous economic and political clout. China is effectively insuring against future challenges to the dollar’s dominance by building up its gold reserves. Several central banks are also increasing the amount of gold they have in reserve, especially those in developing nations where there is a growing concern over geopolitical unrest.
China is not by itself. For in choppy waters, gold is a shimmering fence.
Consider the world financial system to be a large ocean. Capital flows freely and investor confidence is high during tranquil times. However, when global storms blow up, uncertainty sets in and investors flee to safe havens as currencies plummet. Here’s where gold really shines.
Gold’s value is unaffected by any one issuer or economic climate, in contrast to more conventional assets like equities or bonds. It is viewed as a tangible item with inherent value, a safety net amidst the turbulent waves of unstable finances.
Because of this, the RBI added to its holdings of gold by purchasing 13 tons of the metal in January and February of 2024. A wise decision that increased foreign reserves by $3 billion due to the appreciation of gold.
With its currency falling, Turkey purchased 12 tonnes of gold in 2023. Kazakhstan also increased its foreign reserves by selling 6 tonnes of gold, as did Jordan. Gold is the ultimate hedge, which has everyone excited.
In addition to Iran’s volatility, the current hostilities in Israel and the Ukraine have increased the appeal of gold as a safe haven. Fears of inflation and a worldwide economic slowdown have been heightened by the war in Ukraine, which has resulted in severe sanctions and supply chain disruptions. Afraid of the wider implications, investors have turned to gold for comfort.
When geopolitical danger is elevated, gold prices usually climb, and the latest events are no different.
For the time being, gold will still gleam in the shadow of swords. We are all dead in the long term, to borrow Keynes’s words.