Goehring & Rozencwajg Associates, LLC, a research firm focusing on natural metals investments with over 30 years of experience working in dedicated resources, believes central banks may be gearing up for a new monetary regime where gold would take the crown. The U.S. dollar has held its status as the primary global currency for quite some time, though recent hits to its value have many nations questioning its worth. As more central banks join the movement to diversify their reserves with gold, we’re seeing a trend reversal back to a more robust buying market with nations less reliant on the dollar, which may be becoming an unsteady currency.
According to Leigh Goehring of Goehring & Rozencwajg Associates, LLC, if the U.S. dollar truly loses its power as many predict, the market would see one of the largest shifts in the last 40 years. Such a shift could be a necessary rebalancing considering the constant recession teetering nations have been dealing with for the last few months.
Since the beginning of 2022 and especially in the last quarter of 2023, up-and-coming economies like India, China, Turkey, Qatar, Singapore, and Egypt have created a massive level of gold demand by increasing their reserves at record rates. The gold industry has seen record pricing rates from a demand sector that typically sits quiet, though not anymore.
2022 marked a record-breaking year for central bank gold purchases, with 1,136 tons purchased in total. In the first quarter of 2023, central banks added 228 tons to their reserves, breaking another record for the most tons purchased in the first quarter of any recorded year. 2023 is already on track to beat last year’s amazing feat.
“Emerging markets central banks have been behind the vast majority of the buying over the past 13 years because, on average, they have more than two-thirds of their reserves in dollar debt and less than 5% of their reserves in gold,” George Milling-Stanley, the Vice President and Chief Gold Strategist for State Street Global Advisors, explained. “That is an imbalance they regard as dangerous and it’s an imbalance that they’re doing their best to address.”
Central banks are providing a critical level of demand support to the gold market as the Federal Reserve continues to raise interest rates, quieting other demand sectors. The extensive purchases from central banks have allowed gold to sustain its level above $1,900 per ounce all year, and even hit its high of $2,055 in May, despite the hawkish actions from the Fed.
“What’s happening today with central banks buying gold is that re-emphasizes this sort of chess game being played around these de-globalization trends and the need to own neutral assets,” Tavi Costa, a portfolio manager at Crescat Capital, explained. “With interest rates around the world moving higher, we are going to see a lot more volatility in foreign exchange markets. In this environment, central banks will need to enhance their reserves over time by owning more precious metals.”
This rise in central bank gold demand has been developing for some time now, and it’s just beginning to become a major trend. For the last decade, economies around the globe have begun introducing and embracing the concept of a monetary regime shift. A simple push could force these concepts into fruition; that push was the fall of the U.S. dollar.
Central banks spent years speculating over when and how the fall of the U.S. dollar might occur. What might’ve sounded like a conspiracy theory a few years back is now becoming reality.
As more central banks stockpile gold, growing evidence supports the fact that nations are abandoning the U.S. dollar sooner rather than later. The gold-based monetary regime is no longer just an idea. The U.S. dollar is close to losing its standing.
A gold-based monetary regime allows smaller economies to flourish by using their own currencies. For example, Saudi Arabia is now proposing only paying for its oil sales using the renminbi, including all sanctioned sales from Russia. Brazil also wanted to conduct its agricultural trade with China using the renminbi, while China may accept LNG from TotalEnergies in France for the same currency.
While these small accounts may not constitute a total monetary regime change because of China’s closed capital account, the fact that countries cannot exchange the renminbi is what paves the road for valuable change with gold in the forefront. China has purchased 144 tons of gold in the last seven months alone.
With all this being said, Goehring & Rozencwajg Associates, LLC, expect gold prices to reach $2,100 by the end of 2023.
