The Dollar, The Yuan, And The Gold: Who Will Be The Ultimate Winner?

A reason for gold continuing its upward trajectory is the newfound interest in gold by the central banks around the world. In particular, central banks from China, Russia, India, and Turkey are stacking up gold reserves.

According to the World Gold Council (WGC), demand for gold rose 18 per cent in 2022, taking the world’s gold demand to 4,741 tonnes, the highest for any year since 2011. Gold demand fell 5 per cent in 2023 bringing the demand to 4,448 tonnes which was still robust considering the fact that the 2022 demand followed the pandemic year.

The last time demand for gold reached such levels was when uncertainty about the future of the dollar spiked in the aftermath of the 2008 US financial crisis.

Latest available figures from the first quarter of 2024, suggest that the demand for gold continues to rise. Economies such as China, Russia, France, Japan, and UK have turned out to be net sellers of the US treasury notes, and are buying gold. 

Another reason for the increase in gold prices in India is the rise in gold imports. Imports surged by 26.7 per cent  to US$ 35.95 billion during April-December 2023 due to robust domestic demand, compared to US$ 28.4 billion during the same period the previous year.

In addition to the demand-side factors, depreciation of Indian rupee played a spoilsport. The rupee has depreciated 0.4 per cent against the US dollar since the start of the calendar year 2024. Through the previous financial year, 2023-24, it depreciated 1.5 per cent. Naturally, a depreciating rupee adds to price of gold in India.

Why Are Central Banks Rushing To Buy Gold?

In addition to the uncertain global landscape, which is marked by conflicts such as war, a major factor could be the accelerated pace of de-dollarisation.

The argument is that China, the second largest economy after the US, is increasingly convincing the world’s largest suppliers of energy, including Russia, Saudi Arabia, Iran, and Venezuela to trade in Chinese Yuan. This, according to the commentators, will usher in the demise of the ‘petrodollar.’ It would then be a matter of time before the US economy crumbles, they argue.

The term ‘petrodollar’ refers to the revenue earned in dollars by the oil-producing countries from the sale of oil, which was used to trade with other countries.

In the early 1970s, during the Yom Kippur war, the Organisation of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is a member, implemented an oil embargo. The price of oil per barrel went up from $3 in 1973 to $12 in 1974, and the OPEC member countries earned dollops of money.

The then American President, Richard Nixon struck a deal with Saudi Arabia ensuring that all oil deals across the world would take place in US dollars. Other oil producing nations in the OPEC joined Saudi Arabia, depositing a large portion of their money in the US banks, thus marking the beginning of ‘petrodollar’. In the world of flexible exchange rates, the US dollar became the most sought-after currency.

Fast forward, circa 2023, China and Russia are now trying to break this US hegemony. Other emerging market economies such as Brazil, India, Iran, and off late France, have now agreed to trade in their own currency.

Back home, in February, the Reserve Bank of India (RBI) added 4.7 tonnes of gold to its coffer, taking its gold reserves to an all-time high of 817 tonnes. 

De-dollarisation Gaining Momentum

In August last year, BRICS leaders -- an economic grouping originally comprising Brazil, Russia, India, China and South Africa -- met in Durban, South Africa to discuss new global reserve assets instead of the US Dollar.

Russia is already trading energy with India and China in Indian Rupee and Chinese Yuan, respectively. Saudi Aramco is building a $10 billion oil refinery in China (transaction happening in Chinese Yuan). France and China finalized the first ever deal on 65,000 tonnes of liquefied natural gas in Yuan.

The doomsayers feel that the immediate impact of shunting out the US dollar and replacing it with Yuan/or with any other currencies and assets such as gold can be drastic. The immediate impact is dollar losing value.

In fact, something similar happened during early part of 1970s. Prior to 1971, value of the US dollar was tied with the gold reserves. This meant that the dollar could be exchanged for gold at a fixed rate. However, because of economic pressures such as inflation and the costs of the war in Vietnam, the US government printed more money than what it had in gold reserves to back it up. “Petrodollar” came as a respite and President Nixon abandoned the “gold standard”.

However, in spite of de-dollarisation and new found love for gold in recent times, the US dollar and the economy are showing no sign of weakness. Interestingly, considering the last two years, Yuan continued to depreciate against dollar.

Given that China and the US are each other’s largest trading partners; it is expected that a higher bout of inflation in the US will make the Yuan appreciate. But that did not happened as the Chinese are yet to catch-up with the US in terms of productivity, and that something is not going to fall anytime soon.

The US chip embargo on China is a testimony to the fact that the US government want to keep its economy ahead of China. Although China, during the early part of the millennium, was able to import technology by opening up its economy, it has a long way to go before it can catch up with the US. As per ILO estimates in 2024, China is producing an output of US$ 23,866 per worker, much below America's average of US$ 1,30,942 per worker.

All told, with a robust Indian economy, the demand for gold will persist for now, and my aunt in Kolkata may consider marrying off her daughter sooner rather than later.

(The Author is a professor of finance and economics at the School of Management, Mahindra University).