Gold Prices Reach Record High, Indicating a "Fragmenting Global System"
Unusual Trends in Gold Prices
Over the past year, the price of gold has been behaving unusually. It has been setting record after record, seemingly detached from its usual influencers such as interest rates, inflation, and the dollar. This consistent rise in price contrasts with the fluctuations seen in critical geopolitical situations.
The all-weather nature of gold's price indicates a trend that goes beyond economics, politics, and higher-frequency geopolitical developments. It reflects a persistent behavioural trend among China and middle power countries. This is a trend that requires more attention from the West.
Gold Price Increase
In the past 12 months, the price of an ounce of gold on international markets has risen from $1,947 to $2,715, marking a gain of almost 40 per cent. This increase in price has been relatively linear, with any pullback attracting more buyers. This has happened despite wild swings in expected policy rates, a wide fluctuation band for benchmark US yields, falling inflation, and currency volatility.
Contributing Factors to Gold's Performance
While some may attribute gold's performance to a general increase in asset prices, others link it to the risk of military conflicts, which have resulted in the loss of lives and livelihoods, and massive infrastructure destruction. However, the price journey suggests that there may be more factors at play.
Foreign central bank purchases have significantly contributed to gold's strength. This buying trend seems to be related to many countries' desire to diversify their reserve holdings away from the dollar, despite America's economic exceptionalism. There is also an interest in exploring alternatives to the dollar-based payments system, which has been the international architecture's core for about 80 years.
Loss of Confidence in America's Global Management
The reason behind this trend is often attributed to a general loss of confidence in America's management of the global order. Two specific developments are often mentioned. The first is America's use of trade tariffs and investment sanctions, along with its reduced interest in the rule-based, co-operative multilateral system. The second is Russia's ability to continue trading and growing its economy despite some of its banks being ejected from Swift, the international system governing most cross-border payments.
Fragmenting Global System
The stakes here are not just the erosion of the dollar's dominant role but also a gradual change in the global system's operation. While no other currency or payment system can displace the dollar at the system's core, an increasing number of countries are building alternative routes around this core. This development risks fragmenting the global system and eroding the international influence of the dollar and the US financial system, which would impact the US's ability to inform and influence outcomes and undermine its national security.
Need for Western Governments to Pay Attention
This phenomenon requires more attention from western governments. There is still time to course-correct, although not as much as some might hope.
Bottom Line
The unusual trend in gold prices indicates a shift in the global economic and political landscape. The consistent rise in gold prices, despite traditional economic influencers, suggests a growing trend of diversifying away from the dollar. This development could potentially fragment the global system and erode the US's international influence. What are your thoughts on this? Share this article with your friends and discuss it. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.
