The gold market is increasingly under geopolitical influence

Gold prices took some color at the beginning of the year. They rose more than 1% to $1,859 an ounce (31 grams) in New York on Wednesday, or more than 5% in a month, hitting their best level in six months. A development that reflects safe haven status when the future looks bleak.

However, the yellow metal did not outperform in 2022, a year marked by an energy crisis, war in Europe with Russia’s invasion of Ukraine last February and inflation levels not seen since the late 1970s. gold has returned to almost the same level as in January 2022, around $1,800 an ounce. Because its price rose to $2,070 in March, during the first weeks of the war in Ukraine, but in September, with the acceleration of interest rates, especially the Federal Reserve, it fell back to around $1,600. US to calm the price increase.

Better performance than stock markets

Nevertheless, when it comes to other asset classes, especially equity markets, gold has performed respectably, up almost 6% over 2022, versus -19.4% for the S&P 500. The United States, Europe and China can benefit from the yellow metal, and its evolution will depend on the monetary policy of central banks.

“If the Fed stops, falling US real yields will strengthen the outlook for gold and silver prices in the second half of 2023. Gold prices are expected to average $1,860 an ounce in the fourth quarter of 2023.”JP Morgan bank experts are convinced of their predictions for 2023.

The relationship between the dollar and gold has been reassessed in light of Western sanctions

Especially since the Fed’s monetary policy affects the currency market. Gold has really suffered from the strong appreciation of the dollar, which automatically made it more expensive for holders of other currencies such as the euro or yen to buy the metal.

The relationship between the dollar and gold took on new meaning in 2022, especially for developing countries, with the conflict that Russia initiated in Ukraine last February.

“Geopolitical tensions should continue to provide a valuable hedge against gold tail risk”provides the World Gold Council (WGC) in its forecast to 2023 among the factors influencing the yellow metal market.

Especially with the sanctions imposed on Russia by developed economies, developing countries, led by China, want to reduce their dependence on the dollar, in other words, the United States.

Record and very restrained purchases by central banks

A trend that is evident today with gold buying, as reported by the WGC. In the autumn of last year, during the third quarter, a record level of gold purchase (more than 400 tons) was realized by the central banks.

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If the recipient countries were identified for about a quarter, they remained anonymous for the remaining 300 tons.

The reasoning suggested to traders that Russia should sell gold to China. Moscow needs dollars because the country has banned the use of the Swift system.

“A more reliable assumption given that mining continues in Russia, the world’s second largest producer, and the Russian Central Bank has declared that it has not achieved national gold production. Indeed, the institution based its purchases last March and April on the fact that there were no more buyers in the market, suggesting that this is no longer the case and that national production will find outlets »commented Laurent Schwartz, CEO of Comptoir National de l’Or.

As for China, these large purchases followed the summer of tensions between the US and Taiwan and the Biden administration’s decision to reduce semiconductor exports to China.

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Finally, in November, China’s central bank admitted that it was indeed a buyer of the yellow metal. It said it acquired 32 tons of gold that month, bringing its holdings to 1,980 tons, the sixth-largest in the world, far behind the 8,133.5 tons the United States holds at Fort Knox. The data is all the more notable because it was the first in three years on China’s central bank’s gold-buying policy, which has been a factor, if not at least supportive, of bullishness for international gold prices.

Reduce dependence on the dollar

Because the dollar dominates international trade, Beijing’s strategy is not to dethrone the dollar in favor of the yuan, but to reduce its dependence on the US currency by swapping the dollar for the yellow metal. The People’s Republic of China is still the second largest foreign holder of US debt after Japan.

A movement that is not new, but accelerated by lessons learned from Western sanctions on Russia. Since the early 2000s, China has launched markets dedicated to precious metals, such as the Hong Kong Gold Exchange and, notably, the Shanghai Gold Exchange, established in 2014, where quotations are denominated in yuan. “A Russian Finance Ministry official recently said it is working with the Shanghai Gold Exchange to have bullion produced by the two national refineries accredited on the China Gold Exchange. Note that two Russian banks, VTB and Sberbank, are still authorized members of this Exchange.Laurent Schwartz emphasizes.

This dedollarization was also manifested during the summit between China and the Persian Gulf countries in December. Xi Jinping, president of the world’s largest importer of crude oil and liquefied natural gas (LNG), has insisted on developing yuan-based trade. “China will continue to increase imports of crude oil and liquefied natural gas (LNG). (…) and develop the renminbi settlement (another name for Chinese currency) in oil and natural gas business”, the Chinese president emphasized. Beijing already offers futures contracts for the purchase of crude oil with the Shanghai International Energy Exchange, which was established in 2013.

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“Petroyuans” and “petroleum dollars”

This summit is also dedicated to strengthening economic and trade relations between the two sides. Chinese companies can offer the Gulf countries a range of products, from infrastructure to satellites and space, including cooperation on nuclear energy, green technologies, digital and even e-commerce or digital currencies. , aims to play the role of the “petroyuans” that were so successful in the US in the past.