Gold appears well-positioned to benefit from a strong surge that could take it to new record prices in 2023 – and beyond. As you know, I have been following and writing about the precious metals market for a very long time, and I currently see a number of unique catalysts that could contribute to higher gold prices. If you are underexposed or have no exposure, time could be running out to get in at these prices.
Below are three potential catalysts for stronger gold.
Emergence of a multipolar world and rapid dedollarization
I’ll start with what I see as the biggest risk that could benefit gold prices: dedollarization. Recently I wrote about the the end of the petrodollar and the possible emergence of a multipolar world, with the United States on one side and China on the other.
Take a look at the table below. The purple line represents the combined economies of the G7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) as a share of global GDP, in purchasing parity terms. The green line shows the same thing, but for the BRICS countries (Brazil, Russia, India, China and South Africa). As you can see, the G7 economies are gradually losing their economic dominance to the BRICS, especially China and India. Today, for the first time, the main developed countries contribute less to global GDP than the main emerging countries.
The implications could be multiple, but for our purposes, let’s focus only on currencies. Since the end of World War I, the U.S. dollar has served as the world’s reserve currency, and since the 1970s, crude oil and other key commodities, including gold, have traded globally in greenbacks.
This could change with the rise of a multipolar world in which half of all commodities are traded in US dollars, the other half in another currency – the Chinese yuan, perhaps, or a BRICS currency, or a digital currency. like Bitcoin.
A growing share of raw materials is already settled in currencies other than the dollar. Last week, China settled a liquefied natural gas (LNG) trade with France. in yuan for the first time as the Asian giant seeks to expand its economic influence around the world. Since Russia’s invasion of Ukraine last year and subsequent international sanctions, Russia’s reserve currency has been the yuan, according to Kitco News.
Some economists say the time has come for a major competitor to the dollar to step up its efforts. Jim O’Neil, the former Goldman Sachs economist who coined the acronym BRIC, recently wrote an essay urging BRICS countries to challenge the dominance of the greenback, asserting that changes in U.S. monetary policy create dramatic fluctuations in the value of the dollar that affect the rest of the world.
Gold would directly benefit from dedollarization since it is valued in greenbacks. Gold is currently trading at or near all-time highs in a number of currencies, including the British pound, Japanese yen, Indian rupee and Australian dollar, and would likely reach new highs in US dollars if the dollar were also high. devalued.
Acceleration of the liquidity crisis and return of quantitative easing (QE)
The next potential catalyst concerns the continued fragility of certain segments of the traditional financial sector. Under pressure under an estimate 620 billion dollars in unrealized losses, The US banking sector has seen the failure of two major companies this year – Silicon Valley Bank (SVB) and Signature Bank – and a significant erosion of depositor confidence.
As a result of these bankruptcies, individuals and businesses withdrew tens of billions of dollars from banks. In March, bank deposits fell by more than $500 billion compared to the same month in 2022, a year-over-year change more dramatic than the savings and loan crisis of the 1980s and 1990s and the financial crisis.
Where is all this capital going? Money market funds, which are perceived as safer and, in many cases, currently offer higher returns than savings accounts. According to the Investment Company Institute (ICI), a record $5.2 trillion is now in these funds, and the stock is expected to rise significantly further.
Many regional and community banks were already facing a liquidity crisis due to massive unrealized losses, and sudden withdrawals will only amplify the situation. As reserves dwindle, banks will be increasingly less willing to lend to households and businesses, slowing the economy even more than the Federal Reserve’s rate hikes.
In the event that the liquidity crisis turns into a full-blown recession, the Fed would have no choice but to pivot and begin a new round of quantitative easing (QE). The central bank has been trying to clean up its balance sheet, but in a bid to stabilize the banking sector, it added nearly $400 billion in the two weeks ended March 22. During the same period, the price of gold jumped 8.6%, reversing its course. 2023 losses.
Two cold wars
The final catalyst on my list involves a deterioration in diplomacy between the United States and its allies, on the one hand, and Russia and China, on the other. Relations between West and East are as bad as I can remember, and they may get worse before they get better.
In recent interviews and webcasts, I have said that the United States is currently facing two Cold Wars with Russia and China. I hope these conflicts remain “cold”, but there is always the possibility that they become something more – in which case, I would like to be exposed to gold.
I won’t spend a lot of time on this subject, but I would like to point out a recent article that appeared in Foreign Affairs. According to the article’s two contributors, Chinese leader Xi Jinping appears to be boosting his country’s military preparedness by increasing the defense budget and building new air raid shelters in key cities and “military mobilization” offices. National Defense “. “Something has changed in Beijing that policymakers and business leaders around the world cannot afford to ignore,” the article reads.
It remains to be seen whether the military buildup is a precursor to an invasion of Taiwan or something else.
What I do know is that investors have placed their faith in gold during times of geopolitical risk and uncertainty. I have always advocated the 10% rule of thumb, with 5% in physical gold (bars and coins) and the remaining 5% in high quality gold mining stocks, mutual funds and ETFs.
However, not everyone knows where to start, and that’s why we created the ABC investment plan. With just a small initial investment and an affordable monthly contribution, you can start investing in our funds. The ABC Investment Plan is an automatic investment plan that uses the benefits of cost averaging (a technique that allows you to invest a fixed amount in a specific investment at regular intervals) along with financial discipline to help you to achieve your financial goals.