04 Jan 2024
Ned Naylor-Leyland, Investment Manager, Gold & Silver
Ned Naylor-Leyland explains how amidst a global shift away from fiat currencies, gold is poised to re-emerge as the ultimate risk-free asset, signaling a paradigm shift in monetary risk perception.
The global financial landscape is undergoing a profound transformation, driven by a confluence of factors, including the accelerating de-dollarization trend, the relentless accumulation of gold reserves by creditor central banks, and the growing concerns about the long-term sustainability of fiat currencies. Amidst this backdrop, gold is poised to re-emerge as the pre-eminent global risk-free asset, marking a significant paradigm shift in the way financial markets perceive and value monetary assets.
The de-dollarisation trend and gold’s ascendency
The dominance of the U.S. dollar as the world’s reserve currency has been under increasing scrutiny, with central banks worldwide diversifying their reserves away from the dollar and towards gold. This de-dollarization trend is evident in the actions of major economies like Russia and China, which have significantly increased their gold holdings in recent years.
The People’s Bank of China (PBoC) has been particularly active in accumulating gold reserves, adding around 600 tonnes year-to-date. This aggressive stance reflects China’s growing influence in the global financial system and its recognition of gold’s enduring value as a safe-haven asset.
The U.S. Treasury market, the world’s deepest and most liquid bond market, has been exhibiting signs of dysfunction, raising concerns about the long-term stability of the dollar. The recent surge in Treasury yields and the widening of spreads between U.S. Treasuries and other sovereign bonds have heightened market volatility and uncertainty.
These developments have cast a shadow over the dollar’s future as the world’s reserve currency as investors are increasingly questioning the dollar’s ability to maintain its purchasing power and its role as the primary anchor for global financial markets.
In contrast to the growing uncertainties surrounding fiat currencies, gold remains a beacon of stability and permanence. Throughout history, gold has served as a reliable store of value, a hedge against inflation, and a refuge during times of economic and political turmoil.
Gold’s unique characteristics make it the true risk-free asset in the eyes of many investors, including central banks. Unlike fiat currencies, gold is not subject to the whims of central bank policies or the vagaries of economic cycles, so its scarcity, durability, and universal acceptance ensure its enduring value as a monetary asset.
A turning point in risk perception
The market’s hesitation to fully embrace gold is evident in the recent struggles of the gold price to break above $2,050 per ounce. However, this resistance is expected to crumble once gold breaks free above $2,100, signalling a fundamental shift in risk perception.
This breakthrough would mark a turning point in the way financial markets think about monetary risk-free assets, with gold poised to assume its rightful place as the primary store of value and global reserve standard.
The catalyst for this paradigm shift could come from either rising inflation expectations driven by geopolitical tensions or falling rate expectations due to economic data deterioration or financial market disruptions. Regardless of the trigger, a significant adjustment in risk perception is imminent.
A shift in the market’s view of risk-free assets would have a profound impact on gold and silver mining equities. These heavily discounted stocks are poised to benefit from a surge in gold prices and the renewed recognition of gold’s importance in the global financial system.
Gold’s reign ascendent
The actions of creditor central banks, the growing concerns about fiat currencies, and the unique characteristics of gold all point to a looming paradigm shift in the way financial markets perceive and value monetary risk-free assets. Gold is poised to regain its position as the world’s global risk-free reserve asset, marking a return to monetary discipline and the multipolar Bretton Woods system, ensuring gold’s role as a cornerstone of the global financial system.
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