Gold has returned to its ancient role as a classic hedge

John Wreford/SOPA Images/Sipa USA via Reuters Connect

Dubai has been known as the City of Gold since the 1970s when the emirate emerged as the most important bullion trading hub between London and Hong Kong – even though there is no major mine within 3,000 miles. 

The gold souk in Dubai’s Deira district is ever popular with tourists but it also holds nostalgic resonance for me as I first learnt the secrets about gold futures trading on New York Comex exchange in its labyrinthine streets.

Gold’s spectacular bull run of the last two years is fuelled by a unique set of geopolitical, monetary and financial catalysts. 

The yellow stuff bottomed at $1,650 in October 2022 and has risen an incredible 52 percent in the past two years, easily outperforming the US stock market and most major asset classes in world finance. 

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Conventional monetary wisdom would have argued that gold prices would fall in late 2022 after King Dollar hit a high against its trade weighted index DXY at 112.

Jerome Powell’s Fed had raised its overnight dollar borrowing rate from 0.25 percent to 5.25 percent in the US central bank’s most brutal hard money pivot since the Volcker era in the early 1980s.

An inverted yield curve and a strong dollar are kryptonite to the price of gold in a normal precious metal cycle. Yet there is nothing normal about the current bullion gold bull market. In this instance, geopolitics is the reason why this cycle truly is different.

The White House froze $600 billion of Russian central bank assets and blackballed Russia’s banks from the global US dollar capital markets and SWIFT.

This was a game changer event in international finance as the Chinese Politburo grasped the lessons of the post-Ukraine global banking village, where the US Treasury is capo di tutti i capi.

China now earns $100 billion a month in exports and invests this hard currency war chest primarily in the bullion market and not in weaponised US financial assets, as was the case before the Russian asset freeze.

Iran, Cuba, North Korea and Venezuela are also rogue states in the US Treasury geopolitical crosshairs and under sanctions for decades.

After Ukraine’s invasion, China’s central bank reserve managers and Beijing’s secretive sovereign wealth funds have become the “800-pound gorilla” net buyers in the bullion market.

China’s financial elite have also accumulated gold at a time when the yuan, Chinese equities and property prices have been in free fall, with contagion risk rising in the Middle Kingdom’s $7 trillion shadow banking casino.

Gold is thus a hedge against banking, property, FX and geopolitical risk for China’s flight capital kingpins, as the fate of Jack Ma attests.

Bitcoin's psychotic volatility makes crypto unattractive for global institutional funds seeking to hedge US dollar debasement risk. The trade-weighted US Dollar Index has fallen from its recent 112 peak to below 101.

It is ironic that the US dollar has lost more than 10 percent of its exchange value even before the first Fed rate cut even begins at the September 18 FOMC conclave. 

The gold market thus reflects a smart money's visceral fear about a $35 trillion US national debt that is rising by $1 trillion every 90 days, thanks to the Biden White House's fiscal largesse.

The US budget deficit is now $2 trillion or almost 7 percent of the American GDP, a metric that sent Mexico, Brazil and Argentina to the IMF's intensive care unit in the 1980s and gutted the capital of New York's money centre banking colossi.

Latin American sovereign loans are the reason Chemical, Chase Manhattan, Manny Hanny, First Chicago and Continental Illinois no longer grace the US money centre banking constellation. Neither Donald Trump nor Kamala Harris has presented a credible plan to restore fiscal sanity. 

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The current strategy to debase the US dollar and issue untold billions of US Treasury bills to meet Uncle Sam's funding needs is set to continue. It should be no surprise then that gold has resumed its ancient role as the classic hedge against monetary inflation.

How else do I reconcile 2 percent CPI in America, a deflation in China, a German recession and EM sovereign debt crisis with a 52 percent rise in gold since 2022? 

In further supporting factors, gold is not an industrial metal but AI demand has led to a surge in gold in US microchip production.

Gold has also been "dowry risk insurance" for Indian brides since Vedic times and Modi's India is now the fastest growing major economy in the world at 7.2 percent. A falling rupee, high inflation and thus frenzied gold hedges defines Modinomics.

The scale of the Fed rate-cut cycle, geopolitics and reserve currency dynamics will determine the next twist in the auric bullish tale. I expect a gold price of $3,000 as a credible strategic target by 2026.

Matein Khalid is the chief investment officer in the private office of Abdulla Saeed Al Naboodah and the CEO designate of a venture capital firm. He is also an adjunct professor of real estate investing and banking at the American University of Sharjah