Gold Price Benefits from Global Instability and Multi-Polarity
KS Advisory - Insights, March 08, 2024
This topic can fill up several pages, but here is the short version on long term tailwinds for gold price and why it makes good sense to hold in investment portfolios.
First, its about geopolitics. Geopolitical fragmentation has been been surfacing more clearly since 2015-2016 has resulted in steady gold demand, especially for central bank reserve managers. The world moving from uni-polarity to multi polarity has created tremendous stress on governments and will, indefinitely stress the global political and economic system.
When viewed from the perspective most key reserve currencies, we find that almost all of them belong to governments of NATO member countries. Given the NATO position on Russia, China and a growing number of BRIC Plus member countries, countries not aligned to the NATO view of the world will increasingly find it difficult to hold large currency reserves in currencies issued by hostile states. This geopolitical fragmentation has created demand for what I call, for now, second tier reserve currencies, such as the Chinese Renminbi (RMB). With not many good options left, increasingly the go to reserve asset is gold. As the NATO and US in particular, list of sanctioned countries grows, so should gold demand. Recent escalation of language between NATO and non-NATO member countries is adding fuel to the fire, from which there seems to be no reprieve. Finally, where it is housed and stored is also now a key consideration for reserve managers.
The geopolitical realignment will continue and likely get entrenched leading to continued move towards what I call Ideologically Aligned Trading Blocks (IATB)1 and eventually more clear currency blocks. The US presidential election in November may result in a bolder foreign policy position, resulting in greater uncertainty, worldwide.
Second, its about secular inflation. A view that I have held for several years is that while cyclical inflation will ebb and flow, secular inflationary pressures will persist and create a constant upwards pressure on inflation measures. For secular inflationary pressures, please see the post from March 7, 2024 on yield curves.
The problem with secular inflationary pressures is multidimensional given the inability of central banks to counter it in any meaningful manner. As such allocations to assets that provide an inflation hedge is a must have allocation in investment portfolios.
Third, as Ai and robotics play an increasing role in mining and extraction (gold and other resources), mining will increasingly pass environment and social (ESG) considerations, allowing large sustainability and ESG sensitive money managers to allocate to gold with less concerns about ESG factors.
There are other factors supporting price as well, but the above three points, in my view, are the most pertinent medium to long term drivers of price.
I hope this helps and provides some “food for thought”.
(Fun fact - The Au chemical symbol for gold is from the Latin word for gold, aurum.)
Your feedback is welcome.
Notes and References
- Idealogically Aligned Trading Blocks - Belal M Khan, November 10 2022 - https://vimeo.com/769464484#t=2034s
- S&P Global - POWER OF AI: AI's big promises start to deliver for miners adopting new tech - 19 Oct 2023
- IMF Working Paper - Gold as International Reserves: A Barbarous Relic No More? Serkan Arslanalp, Barry Eichengreen, and Chima Simpson-Bell WP/23/14
- Scientific Research Publishing - “BRICS Plus”: A New Global Economic Paradigm in the Making? Raul Gouvea, Margarida Gutierrez, Anderson School of Management, University of New Mexico, Albuquerque, USA.
- COPPEAD, Universidade Federal do Rio de Janeiro, Rio de Janeiro, Brazil.
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