From “Dividing by Zero” (Global Knowledge, 2016-2017), Ana Nives Radovic
While the price of gold continues to rise it is a sign that financial resources should be turned into gold, opening the question about the latest causes of this phenomenon and whether gold really still has the status of “safe heaven” investment.
This month’s trading on a global financial market was under the impact of the president of the United States Donald Trump who dismissed the director of the FBI, since an investigation underway could lead to the opening of an exclusion procedure. This unavoidably had an impact on the value of the American dollar, moving the investors to other assets.
On the other side of the Atlantic the start of the monetary downturn from the European Central Bank, their decision not to add 80 billion euros every month, but to reduce it to 60 billion monthly. The expectation that this situation will not be something that the banks in the Eurozone will not be willing to accustom easily tempted bigger awareness of the stock market which so far has been pulled up mostly by banking shares.
Both of these situations have caused the rise of the price of gold. Besides that, two big countries, Russia and China, are the leading global importers of this precious metal and they are making efforts in arranging a new global financial system that is supposed to be completely autonomous and detached from the dollar.
The first half of 2017 was marked by several serious political events, including some of the most critical elections in the Netherlands and France, there are odds-on chance that the financial world is relatively distress with the apparent outcome of a renewed demand for safe assets, where the gold takes first place.
Another thing is that since 2015 the Chinese yuan is incorporated into its official reserves of the Central Bank of Russia announced for the first time to have integrated, which until that time consisted of 44 percent of dollars, 42 percent euros and a bit more than nine percent of pounds sterling.
At this time China and Russia are increasing their gold reserves considerably, making an allowance for progressively strict way of monetizing gold as the foremost mechanism of trade arrangement, particularly through their currencies now held up by gold and also within the structure of an exchange system analogous to that of the rest of the world still locked by a dollar in decline.
Last year at the same time, demand for gold, supported by purchases of the exchange-traded funds, was exceptional. With the uncertainties generated by the prospect of a possible Brexit, investors had massively taken refuge in the gold contracts during the first quarter of 2016.
Global gold demand continued to grow in the second quarter of 2016, marked by the deepening crisis with Brexit and worsening geopolitical factors by 15 percent. Demand for gold reached 1,290 tons in the first quarter of 2016, an increase of 21 percent in comparison with the first quarter of 2015, making it the second-largest quarter in terms of demand.
The price of gold has even augmented by 25 percent in this first half of the year, which represents its highest performance for more than 35 years, while on a twelve-monthly basis global demand for gold fell by 18 percent, a plunge to be put into perspective given the exceptional demand last year, evoking that the first three months of 2016 correspond to the strongest first quarter ever in terms of demand. Gold demand, with a total of 1064 tones, reached a new record in the first half of 2016, surpassing the previous peak by 16 percent in 2009 that was present in the peak of global financial crisis.
When it comes to the strongest political impacts on global financial market it was the election of Trump that pushed investors into a short-lived optimism. Regardless of the prospect of a stronger dollar and a rise in U.S. interest rates, there is still vagueness at the global level today, both economically and geopolitically.
Central banks remained strong buyers, buying 109 tons in the first quarter, while the supply increased by five percent. This increase was fueled by a massive influx of 364 tons of gold-traded funds, reflecting a huge escape from currencies into gold, since the market participants are concerned about the global economy. Also, the investment was the largest component of the demand for gold for two consecutive quarters.
There are two possible outcomes of the current situation, where the first one is reaching the global agreement for maintain the dolar’s status of the world currency, while the other one is related to manipulation with the price of gold. The global agreement is related to upholding the value of the dollar. Since the macroeconomic data of the United States are showing a decline from quarter to quarter, the dollar is no longer used as much in everyday life around the world. The central financial institution in the U.S. Federal Reserve continues the trend of printing money, opening the space for the deficit that became unmanageable. This made the investors recognize that they have to look for alternatives to the green currency.
On the other hand, finding alternatives is not something that banks cannot practice. In this regard, the setback comes from the investment banks, creators of the gold and silver markets and its agents, which are looking for a particular advantage at the cost of investors, as it was the situation in the past. This is obtainable by spreading panic and transferring funds to others, so they can take advantage of the upbeat period until the next similar occasion.
As this has happened several times during the past decades, those were the emerging countries, in particular China and Russia that have benefited from buying gold at artificially low prices, expressed by all these manipulations, which explains the shortage of this precious metal, particularly because Chinese buyers do not return it to the market.
At the same time it is Germany that does not considering publicly the fact that its gold is stored in the United States could be sold and therefore there is no asking for its repatriation. This is why this enthusiastic phase would last for a certain time based on the correction where the potential is considerable for the emerging countries to make further movements in order not to be allied to the dollar.