Gold Outlook: Global instability spurs surge in yellow metal’s prices; will countries return to gold standard?

Gold has outperformed all other asset classes in the current calendar year so far, not only maintaining its physical allure but also generating substantial returns. At the start of 2024, the price of spot gold was trading at $2,062 per ounce, while it is now valued at $2,391 per ounce, marking a rise of 16%. During mid-April, it even reached a new peak of $2,450 per ounce.

Similarly, domestic gold prices have surged from ₹63,225 per 10 grams to ₹72,958 per 10 grams, touching a record high of ₹74,442 on May 20.

Worsening geopolitical tensions, including wars in the Middle East and Ukraine, along with the prospect of lower U.S. interest rates, have all bolstered gold's appeal as an investment.

Additionally, relentless demand from China and India, driven by retail shoppers, fund investors, futures traders, and strong buying from global central banks, drove the price of yellow metal to unprecedented heights.

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For centuries, gold has been cherished for its rarity and intrinsic value. Unlike fiat currencies, which are vulnerable to inflationary pressures and government interventions, gold has historically demonstrated resilience by maintaining or even appreciating its worth over extended periods. This enduring stability makes gold a sought-after asset among investors seeking refuge during times of economic volatility and geopolitical uncertainty, circumstances that are particularly prevalent in the current global climate.

Major central banks worldwide, especially in Asia, are actively diversifying their foreign exchange reserves away from the U.S. dollar. China has been at the forefront of this effort, reducing its holdings of U.S. Treasuries to purchase substantial amounts of gold instead.

The People’s Bank of China (PBoC) continued its gold acquisition streak for the 17th consecutive month through March 2024. According to the World Gold Council, the PBoC purchased 224.88 tonnes of gold in 2023, following an acquisition of 62.1 tonnes in 2022. In the first quarter of the current year, the PBoC added another 27.06 tonnes to its reserves.

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Similarly, India increased its gold purchases, acquiring 19 tonnes in Q1 FY24, surpassing its total purchase of 16 tonnes for the entire CY23. The Reserve Bank of India also repatriated 100 tonnes of its gold from the UK to its domestic vaults, as reported by The Times of India in May.

A significant number of central banks plan to continue buying gold in the coming year, driven by heightened geopolitical and financial risks that enhance the metal's appeal. According to a recent survey by the World Gold Council, approximately 20 central banks intend to increase their gold holdings, though the survey did not specify which nations expect to buy.

Media reports indicate that the BRICS nations, now wealthier than the G7 and accounting for one-third of the world's GDP, are discussing the launch of a BRICS cryptocurrency potentially backed by gold. This initiative aims to establish an alternative to the global order, which they perceive as being unfairly dominated by the West since World War II.

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Major nations, including China and Russia, have been striving for years to end the dominance of the U.S. dollar in global trade. This effort has intensified recently, especially after the U.S. froze Russian foreign assets, leading to a loss of confidence in Western financial institutions.

Additionally, it was reported that the Central Bank of Russia (CBR) replaced the U.S. dollar with China's yuan as the benchmark for all currency trades in the country. This move came in response to a new series of U.S. sanctions imposed due to Russia’s ongoing invasion of Ukraine.

Meanwhile, the 'petrodollar' system formally expired on June 9, marking the 50th anniversary of the military and economic pact signed in 1974 by US Secretary of State Henry Kissinger and Saudi Prince Fahd bin Abdulaziz Al Saud.

According to media reports, Saudi Arabia has chosen not to renew the agreement. Experts believe this could signal the end of the dollar's dominance, as countries may now import oil without relying on the US dollar.

The broader significance lies in the fact that surplus oil exporters, traditionally paid in dollars, would recycle these funds through purchases of US Treasury bonds, thereby helping to finance US trade deficits.

In light of these developments, Mahendra Luniya, Digital Gold Expert and Chairman of Vighnaharta Gold provides insights into the future outlook for gold.

Edited excerpts:

Given the current global economic uncertainties, what are your predictions for gold prices in 2024?

For the past two and a half years, the war between Russia and Ukraine has been ongoing. Initially, not only Putin but the entire world thought that Ukraine, akin to a small wrestler, wouldn't be able to withstand the might of Russia, the sumo wrestler.

However, Putin's strategy has proven to be more formidable than everyone anticipated. Over this period, the continuous support for Ukraine, funded by American and European countries through loans, has put a significant burden on them, a burden they are now compelled to bear.

Germany, for instance, is showing signs of heading into a recession. The United States is mired in $35 trillion of debt, leading to substantial economic challenges.

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Additionally, the ongoing Israel-Hamas war requires significant American assistance. Political advantages are being prioritised over economic stability, exacerbating the situation. The intensifying Israel-Hamas conflict is impacting major investors in these countries, leaving them with fewer investment options and turning them towards gold.

Additionally, there are anticipations of the blow-up of some global conflicts brewing on the eastern side of the globe. China’s continuous show of dominance against nations in the South China Sea, especially Taiwan, has been alarming. Consequently, gold prices are expected to remain high in the coming years.

How will the end of the US-Saudi Petrodollar agreement affect gold prices in the near term?

Recently, there have been multiple news articles analysing the implications of the end of the US-Saudi Petrodollar agreement. In our view, these may as well be mere rumours, and the culmination of the Petrodollar agreement may not be true, given that there is no public record of the existence of any such agreement.

Political experts have commented that there may have been verbal commitments for the process to work, but no document in the public domain is available to substantiate such an agreement.

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Further, the possibility of the existence of a secret agreement to this effect is bleak, and even if it did exist, it would have already been broken last year when Saudi Arabia traded oil with countries in currencies other than the dollar. Also, even if the agreement existed and has now ended, this has not triggered a sudden downward spiral in dollar value.

In our view, the world is moving towards de-dollarisation, but this is, at the very least, a process that would require several decades to materialise. This long-term de-dollarisation would strengthen gold. But there is no immediate hard stop on the Petrodollar today, and thus no huge implication on gold prices is expected in the short term.

Considering that central banks have been supporting gold prices by purchasing significant quantities, do you anticipate this trend to continue?

In recent years, major economic powers have encouraged their central banks to actively buy gold. We see that this shift was initiated as a response to uncertainties building across global economies due to wars, sanctions, and financial action against countries.

It is a move to reduce dependence on forex reserves. The restriction imposed by the US and the West on Russia’s forex reserves has come as an eye-opener to the world about the dependence on the US dollar and the negatives it can yield in the future.

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The developing economies have thus picked up on the cue and started to diversify their reserves into other, more reliable assets, such as gold.

Increasing gold reserves is also backed by the concept of making local currencies stronger. Economies have understood the significance of a strong currency and the inflationary hits that they face due to the dollar's dominance.

Thus, reducing dollar reserves and moving them to gold is the trend followed across developing economies. This trend is expected to continue, with India and China being at the forefront of it, backed by their growing dominance on a global footing. Thus, the continuation of the trend is expected to support gold prices and keep the trend positive over longer-term horizons.

What is your opinion on gold-linked currencies? Do you foresee a return to the gold standard by any countries?

More than 70% of the world is gearing up for elections this year, and unstable governments are emerging in various regions. This global instability is causing central banks and major investors to increase their gold purchases significantly.

In this context, a global discussion is emerging: Will all countries return to the gold standard? The immediate answer is no.

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If such a shift were to occur, gold prices could skyrocket to five crore rupees per kilogram, or $15,000 to $20,000 per ounce (31.1 grams), plunging the world into a new economic crisis. While this isn't foreseeable in the near future, the trend is certainly moving in that direction.

By the end of 2024, gold prices are expected to reach $2,800 per ounce, or 78,000 to 80,000 rupees per 10 grams in Indian currency. Over the next five years, gold prices could reach two lakh rupees per 10 grams. Currently, the overall stability in the world is spiralling downward, with countries prioritising their own interests over the welfare of humanity. Until this changes, gold prices are set to rise steadily.

The possibility of shifting to a full gold standard is close to negligible given that the financial system has developed through fiat currency over the years, and backing all currencies currently floating to gold is highly unlikely. The trend of de-dollarization is something to factor in.

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Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.