Russia, China Joint Challenge To Hegemony Of The US Dollar Is Behind Gold’s Record Surge

Gold prices are hovering at record highs globally. In India, pure gold is today quoting at Rs 5,400 a gm and ornament gold at Rs 5,216 at Mumbai bullion market.

On COMEX (Commodity Exchange) in the US, the December gold contract hit $2,009.50 a troy ounce last night (3 August) before dropping to $1,991 as the US dollar gained a tad.

A major reason for gold zooming to record high this year is due to the weakness of the US dollar. The yellow metal has gained nearly 37.50 per cent this year.

On the other hand, the US dollar index, in which the greenback is weighed against a basket of other currencies, was ruling at 93.37. The index has dropped 4.36 per cent this year with the fall being a sharp 6.35 per cent in the last three months.

Gold has also gained as people have sought safe haven in it in view of the economy being affected by the novel coronavirus pandemic. With a question mark hanging over the performance of the equities market, investors have decided that it is wise to put their money in gold.

Be that as it may, there is another issue with the rise in gold prices and falling dollar. Gary Wagner of goldforecast.com says that the dollar’s weakness has aided the recent bull run of the yellow metal to a record high.

Horizon ETF portfolio manager Nick Picquard was quoted by Kitco News as saying that gold’s rally was telling investors that the financial system with the dollar as the reserve currency needs some changes.

One of the discussions that has been hogging limelight recently in the yellow metal’s golden run is how Russia and China have successfully mounted a challenge to the dominance of the greenback or Benjamin, as the $100 bill is called.

Russia and China have pulled down the share of the US dollar in trade between them to below 50 per cent during January-March this year. Four years ago, Benjamin's share was 90 per cent of their trade.

Russian daily Izvestia reported that the share of the greenback dropped to 46 per cent in the first quarter this year from 75 per cent in 2018 in trade between China and Russia. The Euro, Chinese yuan and the Russian rouble made up 30 per cent, 17 per cent and 7 per cent respectively, of the remaining 54 per cent.

Trade experts see the China-US trade dispute running since 2018 as the main reason for the US dollar’s diminishing role with Beijing wanting to curb the greenback's dominance.

Russia has also gone public with its view that it is pursuing a policy to gradually “de-dollarise” and enter into new deals with other nations in local currencies, wherever possible.

Russian Minister of Foreign Affairs Sergey Lavrov said the “de-dollarisation” was in response to the “unpredictability of US economic policy and the outright abuse by Washington of the dollar's status as a world reserve currency".

Russia has been pursuing the policy to cut the dependence on the US dollar as the reserve currency since 2016. Currently, the Euro accounts for 46 per cent of Russia’s trade with the European Union.

Until March this year, Russia had bought gold valued at $40 billion and the yellow metal at 2,300 tonnes accounts for 23 per cent of Moscow’s international reserves. In the second half of 2014, gold made up only 10 per cent of Russia’s international reserves.

US economic sanctions against its trade partners had triggered Russia’s gold purchasing spree. London-based SP Angel Corporate Finance LLP partner John Meyer was quoted by Gazeta of Moscow that gold is the best liquid investment if the world should not be held hostage by the US dollar.

Last week, US investment bank Goldman Sachs, which has predicted gold to rise to $2,300 within a year, warned that the US dollar could lose its world’s reserve currency status.

The bank said US policy was responsible for this, adding that there were real concerns over the “longevity of the US dollar as a reserve currency”.

The greenback makes up 88 per cent of all currency trades and, according to International Monetary Fund (IMF) data, it accounts for 62 per cent of the foreign exchange reserves globally. This is, however, 23 percentage points lower than the peak witnessed in the 1970s.

Many countries such as China had preferred to hold their currency reserves in the US treasury bonds and this was why the dollar was construed as the world's reserve currency.

In addition, China has stepped up the use of its currency in Africa, where it has funded or invested in a big way. China emerging as Africa’s biggest trading partner has helped to increase the use of the Yuan.

China is now encouraging Saudi Arabia to dump the dollar as it has become the largest buyer of crude oil from the Gulf kingdom.

In addition, the United Nations and IMF are pushing for a new world reserve currency to create a system that will not depend on the US dollar as the only reserve currency.

Besides, Russia and China are trying to impress upon BRICS (Brazil, Russia, India, China and South Africa) to use their currencies more in trading instead of the dollar. An agreement between BRICS members is likely soon on the issue.

The move to undermine the US dollar could wreak the US economy leading to inflation, higher interest rates, and creating problems in paying off debts.

India was the first among the global nations to call for an alternative to the US dollar.

Addressing the Golden Jubilee celebrations of Indian Independence in Singapore in 1997, the then Indian Commerce Minister, Ramakrishna Hegde, mooted an alternative currency to the US dollar at least at the Asian level.

Probably, Russia and China are fulfilling his dreams with the Donald Trump administration pushing its luck too far on disputes with its trading partners.