Can Gold Push out the U.S. Dollar as International Tensions Come to a Boil?
As the Russia/Ukraine conflict continues to intensify, the risk of deglobalization only grows. Amid escalating tactics from both sides, Vladimir Putin has issued nuclear warnings, while President Joe Biden has been rallying allies in an effort to defend democracies. All this is happening as gold makes its own appearance in this equation, being at the centre of new sanctions and driving a shift away from U.S. dollar hegemony.
In this post, we will explore how gold is playing a pivotal role in this conflict and how that could shape the future of global stability.
Putin gives a nuclear warning, Biden rallies allies – reads a Reuters headline three days before the one-year mark of Russia invading Ukraine. Also, the escalation of tactics and rhetoric is seen on both sides. The Reuters article went on to say:
U.S. President Joe Biden and Russian President Vladimir Putin have been sparring verbally, presenting starkly different views of the world and the Ukraine war, with Biden promising to defend democracies and Putin asserting the West was a threat to Russia.
Biden made an unannounced visit to Kyiv and Poland this week to show United States (and NATO) support for Ukraine “there should be no doubt: Our support for Ukraine will not waver, NATO will not be divided, and we will not tire”.
For his part, Putin suspended a bilateral nuclear arms control treaty, announced new strategic systems were on combat duty and warned that Moscow could resume nuclear tests. Putin said:
“The elites of the West do not hide their purpose … They intend to transform a local conflict into a phase of global confrontation. This is exactly how we understand it all and we will react accordingly because in this case, we are talking about the existence of our country.”
Also, the U.S. and European allies are set to impose a new round of sanctions on about 200 Russian individuals and entities. This newest package of sanctions, expected to be announced later this week, are expected to target Russian governors, family members of Russian government officials, and defense and technology firms.
The alleged sanctions
This round of sanctions is also expected to include provisions for “alleged sanctions- evasions networks”. These alleged networks help Russian oligarchs make investments in assets where it is difficult to track ownership, such as complex commercial real estate deals.
While the United States is “rallying its allies”, top officials from China are visiting Russia and China is increasing its verbal support for Russia. According to reports, Wang Yi, director of the Office of Central Foreign Affairs Commission of the Chinese Communist Party, will meet with the Russian Foreign Minister.
This visit is mere days after Secretary of State Antony Blinken said China is “considering” taking on a more active role in the Russia-Ukraine conflict, including providing “lethal weapons”.
With the growing chasm between, for simplicity of labels, the West versus the East, we have to look at the effects of this on global stability, and afterward consider the physical metals
Moreover, the pre-covid quest for globalization and increased trade among countries had driven certain conflicts underground or into the background.
For example, the U.S. did not want to upset China “too” much over policies such as human rights, and China was careful in its criticism of the countries and international institutions and followed the guidelines of the World Trade Organization when it wanted to join in 2001, and the guidelines of the IMF when it wanted to get the renminbi as part of the IMF’s special drawing rights. However, as these relationships erode the underlying differences and issues start to be uncovered and fester.
Is this the decline of the U.S. dollar?
One thing that is clear: the hegemony of the U.S. dollar and U.S. influence is eroding further. This decline is a long process however, as it takes many years for systems to be changed – but it is changing, less “trust” in the U.S. and in the U.S. dollar is an emerging sentiment, not only in China and Russia but also in other countries around the world.
It is yet to be seen what will replace the U.S. dollar as the ‘main trading’ currency. As ‘trust’ in the U.S. dollar erodes so does the ‘trust’ in other governments’ currencies. Would we ‘trust’ China’s government if the renminbi was the reserve currency, what about the euro bloc, or even the U.K. government, each of these have their own issues to sort out!
Moreover, for the U.S. dollar to lose its ultimate status something else must take its place. Neither the Russian currency nor Chinese currency are viable alternatives since those economies are closed to investment from western outsiders.
The Euro would fail to usurp the U.S. dollar because of internal politics, including the ability of members to leave the bloc, and the inability to project regional dominance over matters of security – during either peacetime [shutting nuclear generation in favour of Russian gas imports] or wartime [Germany initially offered only helmets to Ukraine, now it offers tanks only after UK and U.S. did so].
The increased sanctions from the West will only accelerate the transition to a ‘New World Order’. Remember Russia and its allies have already proposed several alternatives, such as the ‘The Moscow World Standard’ as an alternative to the LBMA (see our post The Russian Gold Standard and there is an alternative to S.W.I.F.T. China’s Cross-Border Interbank Payment System (CIPS) (see our post: SWIFT Ban: A Game Changer for Russia?).
And as we discussed as recently as our February 16 – even central banks are losing ‘trust’ in other countries’ currencies and have turned to gold. Unlike China or any BRICs member, gold has no armies of tanks under its command. Which means it has no neighbours to conquer or friends to lose.
Because gold is neutral geopolitically and inert chemically the physical metal stands a great chance of being the U.S. dollar usurper or at least the backer of one; whenever such a divisive idea finally gains global momentum.
From The Trading Desk
The gold price sold off on Wednesday after the release of the Fed Minutes which showed that all Federal Reserve policymakers agreed more rates are needed with a few participants calling for higher rake hikes of 50 basis points.
The hawkish tone from the Fed saw US Treasury bond yields rally and the USD strengthen which weighed on the Gold price.
Gold price this morning has settled around $1,825, back to a level close to where gold started in 2023.
We saw a high of $1,960 on February 2nd but the record job number out of the US for January was the catalyst for the current sell-off.
However, the World Gold Council’s latest Gold Demand Trends report showed that gold demand on an annualised basis increased 18% year-on-year in 2022 at 4,741t, this is the highest annual total since 2011.
Moreover, looking into the figures more closely revel that annual central bank demand doubled to 1,136t in 2022 from 450t which is a 55-year high.
As they say, follow the money!
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GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
22-02-2023 1833.45 1835.75 1518.46 1516.33 1723.63 1723.03
21-02-2023 1833.20 1836.85 1516.42 1519.26 1719.91 1723.70
20-02-2023 1844.20 1845.80 1533.27 1532.94 1725.99 1726.19
17-02-2023 1824.50 1833.95 1527.65 1527.50 1714.85 1719.69
16-02-2023 1837.30 1828.95 1522.94 1526.62 1715.67 1715.37
15-02-2023 1835.45 1831.20 1518.65 1526.49 1711.56 1716.02
14-02-2023 1860.50 1863.70 1525.80 1528.23 1730.08 1732.87
13-02-2023 1858.50 1856.05 1544.04 1531.80 1740.30 1733.55
10-02-2023 1864.10 1859.70 1540.49 1536.67 1740.88 1739.38
09-02-2023 1882.10 1879.10 1549.72 1543.30 1748.09 1743.62
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