Gold has long been considered a safe haven asset. Together with foreign exchange reserves and assets, it forms an integral part of a country’s reserves. Gold can facilitate trade, either in national currencies or in digital currencies. Moreover, wars, geopolitical tensions, financial crises, and high price volatility can all lead to increased demand for gold. However, recently, political impulses have played a relatively greater role than fundamental supply-demand or arbitrage dynamics.
Gold has recently been the main instrument of political revolt against the U.S.-dominated financial order. The dominance of the U.S. dollar is increasingly being challenged by gold and digital currencies as well as the growing trend to trade in national currencies. Many emerging or developing economies are building up their gold reserves. Even the BRICS countries are now working on a new gold-backed reserve currency.
Other key risk factors driving demand for this precious metal include, but are not limited to, rising geopolitical tensions in the South China Sea, the Middle East, South America, and the war in Ukraine. In addition, the tendency to avoid sanctions, the impulse to avoid other external influences, and the fact that the dollar’s role as an international reserve currency is increasingly being replaced by gold, the euro, and the renminbi all contribute to the same end. Moreover, rising interest rates and realized losses due to decreasing market value of the treasuries in reserves is also raising demand for gold reserves.
Despite rising interest rates, there is still a general increase in market demand for gold due to the risk of a banking crisis, geopolitical risks, and the financial turmoil. Gold should therefore continue to be used for hedging against catastrophic scenarios. For all these reasons, this most archaic—for some, even barbarous—instrument of trade and investment has today become a modern instrument of hedging and even of revolt against the financial hegemony of the U.S. dollar.
Read more on Politics Today: Central Banks Rush to Gold Reserves and the De-dollarization Nexus
