Recently, after consistently reaching new highs, the price of gold shows no signs of slowing down, leading many to predict further increases. However, according to Mohamed El-Erian, former CEO of PIMCO and current president of Queens’ College, Cambridge, the gold price trend over the past year is peculiar. He warns Western countries to pay more attention to gold’s trajectory, as its continued rally poses a threat to the dollar-dominated financial system.
Over the past 12 months, gold prices have risen from $1,947 to over $2,700 per ounce, an increase of nearly 40%, and this rise has been unidirectional, with any drops attracting investors to buy the dip. Yet, this is not the only “peculiar” aspect of gold’s rise. Remarkably, the frequent record highs of gold seem decoupled from traditional influences like interest rates, inflation, and the dollar. Moreover, its sustained increase contrasts sharply with geopolitical volatility.
Typically, the trajectory of gold futures revolves around U.S. inflation levels, the economic conditions in the US and Europe, and gold’s role as a safe haven. Gold is generally regarded as a safe heaven.
The unusual nature of the situation suggests underlying factors at play.
According to El-Erian, the “all-weather” increase in gold prices indicates that there are factors beyond short-term economic, electoral, and geopolitical trends. It reflects a persistent behavioral trend among China, ‘middle power’ countries, and others, known as the de-dollarization trend, which should capture the West’s attention.
Central banks around the world are buying gold to diversify their portfolios and hedge against global geopolitical risks, driving prices higher. According to the World Gold Council, global central banks have purchased over 1,000 tons of gold annually in the past two years, a previously unbreached threshold.
El-Erian also notes that sustained bullion purchases by central banks are a significant factor driving gold’s strong ascent. Many countries are eager to diversify their reserve assets gradually and are increasingly interested in exploring alternatives to the dollar-based payment system. The general answer to why this is happening is a widespread loss of confidence in the United States’ governance of global order, specifically due to two factors: the “weaponization” of trade tariffs and investment sanctions by the United States and its decreased interest in a rules-based cooperative multilateral system.
The issue at hand is not just the erosion of the dollar’s dominance but also the gradual change in the operation of the global system. As these alternative international financial pathways continue to develop and grow, the global system might become fragmented, weakening the influence of the dollar and the US financial system and potentially compromising its national security.
Therefore, El-Erian advises Western governments to focus more on this phenomenon, noting that while the time available to correct their course is limited, there is still an opportunity to do so.
