War, de-dollarisation and high inflation drive gold prices over $2,000

War, de-dollarisation and high inflation drive gold prices over $2,000
War, de-dollarization and high inflation drive gold prices over $2,000 / bne IntelliNews
By Ben Aris in Berlin May 10, 2023

​​Gold prices have risen to break through the psychologically important $2,000 per troy ounce mark as emerging markets (EMs) buy up record amounts of the yellow metal to try to insulate themselves against the unfolding polycrisis.

“Gold steadied around $2,030 an ounce on May 9, holding its ground as investors braced for key US inflation reports this week that could influence the Federal Reserve’s next interest rate decision,” Trading Economics reports.

A number of factors have been pushing up the price of gold, a traditional store of value in crisis times. EMs have added impetus to the gold price as countries around the world sell off their dollar assets, usually US treasury bills, as part of a growing de-dollarisation drive since confidence in the dollar was undermined by the US decision to weaponise its currency as part of its extreme sanctions regime on Russia.

As followed by bne IntelliNews, EMs have been buying gold in record amounts, with the leading EMs that are part of an emerging BRICS bloc leading the charge.

Persistent high inflation has been another factor driving gold’s rise. The shortening of supply chains and soaring energy and food prices, started by the COVID pandemic and exacerbated by the war in Ukraine, have led to what some analysts say is a new super-cycle of high inflation that could last for years.

Most of Europe has been hit by sticky double-digit inflation and US consumer prices are also high. The US Federal Reserve bank has been hiking rates at record speed as it battles inflation that has had the effect of pushing other countries into gold to protect against inflation.

Last week the metal reached near-record highs on dovish hints from the Fed, afraid of causing a recession in the US, that it might slow rate hikes to support economic growth.

Gold prices have also been boosted by ongoing concerns on the health of the US banking sector. Rapidly rising rates have undermined the value of bonds held by many banks that have already seen one bank collapse and has put the profitability of more underwater, causing liquidity concerns for the sector.

However, gold prices have recently retreated somewhat, as US recession fears eased somewhat with the Fed hinting that it will slow the pace of rate hikes.

Since Moscow's invasion of Ukraine, Western buyers have avoided Russian gold, a major source of the metal, thereby affecting the bullion market and prompting sellers to seek buyers in the United Arab Emirates (UAE), Hong Kong and Turkey. Last year, the G7 nations and the European Union banned Russian gold imports and prohibited companies in these countries from trading it.

Unable to sell the $20bn of gold mined annually, Russia has seen smaller players replace institutional buyers such as JPMorgan and HSBC. Bloomberg cites ImportGenius customs data showing that Russian gold has been redirected to “friendly” countries without the same restrictions as the West over the six months ending in August.

Merchants in the UAE, Hong Kong and Turkey are still permitted to buy Russian gold, as they are not subject to any sanctions. VPower Finance Security in Hong Kong, which handles cash and gold for Chinese banks, has emerged as a new player, processing over $300mn of Russian gold between March and August 2022.

Over the same period, the UAE received more than $500mn of the metal, with most merchants based in Dubai, such as Paloma Precious DMCC, which imported $109mn. In Turkey, approximately $305mn of Russian gold passed through Istanbul airport during the same six-month stretch, Bloomberg reports.

However, it is likely that Russia is still struggling to reach pre-war levels of gold exports. In the first two months of 2022 alone, JPMorgan saw $1.2bn of Russian gold deliveries before withdrawing after the war began.