VRIC: Gold set to gain as shine comes off US dollar

Escalating U.S. debt and a global move away from the U.S. dollar as the world’s reserve currency presents opportunity for gold and a complex landscape for mining, a recent industry event heard.

Financial commentator Grant Williams last week highlighted record levels of gold buying by central banks, arguing it indicates a strategic shift in reserve asset preferences in an increasingly complex geopolitical landscape.

“Amidst these changes, there’s an increasing interest in gold as a reserve asset. Central banks, recognizing the risks associated with large dollar reserves, are turning to gold for stability,” he said at the Vancouver Resource Investment Conference (VRIC), held Jan. 21.

The resulting rising demand for gold could boost the gold mining sector, boosting investment and exploration. And in the critical minerals space, the strong policy supports the energy transition enjoy as the go-to tool for governments in their fight against climate change also means a bonanza of funds available and earmarked for resource and downstream beneficiation infrastructure.

However, the industry must also prepare for potential volatility in commodity prices and investment flows due to these macroeconomic changes.

A keynote panel discussion on Jan. 21 titled ‘Tectonic shifts in money and power,’ moderated by event host Jay Martin examined the theme of de-dollarization in depth. Panelists discussed how nations and central banks are diversifying away from the U.S. dollar in response to geopolitical events and the quest for more stable reserve assets.

“The world is looking to de-dollarize,” Williams said, highlighting an incremental but undeniable shift towards assets like gold while the global reserve currency transitions.

During his presentation, Martin highlighted three indicators that historically point to an empire’s decline: financial insolvency or instability. Historically, empires fall into financial trouble by spending more than they earn. To manage this, they print more money. This action devalues their currency and creates a gap between the wealthy (asset owners) and the rest.

Second, internal conflict emerges from the financial problems, leading to societal divisions. His research has found that these divisions turn minor issues into major conflicts, causing unrest.

Third, the emergence of external competitors speeds an empire’s decline when others challenge its dominance. “This signals the world that the empire is weakening, and new powers are rising,” Martin said.

He observed that these signs are visible today. He noted the massive debts, economic issues and political polarization of current superpowers. Additionally, new global forces are emerging to challenge the existing order. Martin suggests these signs could mean a shift in global power, similar to historical empire falls.

Continued reserve status?

The dollar’s continued status as the global reserve currency is increasingly in question, a series of panels heard, mainly because oil is priced in dollars, creating artificial dollar demand. However, the shift towards green energy, with goals of 50% adoption of zero-emissions vehicles by 2030 and 80% by 2050, poses questions about the future demand for the dollar in a scenario where oil trade is curtailed.

“Twenty per cent of last year’s oil sales were done in currencies other than the dollar,” Andy Schectman, president of Miles Franklin Precious Metals, said.

Schectman underlined the pivotal changes confronting the mining industry as the world re-evaluates the dollar’s dominance, coupled with the burgeoning debt estimated somewhere above US$40 trillion, not counting the estimated US10 trillion in bonds due this year and another US$140 trillion in unsecured obligations.

Part of the challenge is comprehending the enormity of the U.S.’s financial situation, says Schectman, emphasizing the difficulty in grasping the scale of a trillion compared to a million. “A trillion seconds ago was 31,688 years ago. The numbers are getting far too large,” he said.

Meanwhile, analysts argue that traditional remedies such as central banks raising interest rates to levels seen in the past, like the 18.5% under Paul Volcker (12th chairman of the Federal Reserve from 1979 to 1987), could today cause significant market disruptions across stocks, bonds, real estate, and banking.

“By weaponizing the dollar and pushing green policies, the U.S. might inadvertently be setting the stage for countries like China, Russia, and OPEC nations to pivot away from the dollar,” Schectman said.

Brent Johnson, CEO of Santiago Capital, with US$175 million in assets under management, argued that while the idea of moving away from the dollar is appealing, the practicalities are complex due to the overwhelming U.S. debt. This situation places the U.S. in a precarious position, where raising interest rates to attract investment in its debt might dangerously strain its economy.

“While there is a desire for de-dollarization, the ability to execute it is another matter,” he said, pointing out that this shift, driven partly by geopolitical tensions and the need to reduce reliance on a currency influenced by U.S. policies, signals a significant transformation in global financial dynamics.

The growth of trade alliances like BRICS that includes Brazil, Russia, India, China and South Africa further accelerates the trend. South Africa’s Foreign Minister, Naledi Pandor, announced on Wednesday that Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates have accepted invitations to join the BRICS group. These invitations, extended during a summit in Johannesburg last August, also included Argentina. The members see the addition of these countries to BRICS as a step towards updating what they consider to be an antiquated global order.

Contrarian view

In the ‘Global Macro Outlook’ panel, speakers like Danielle DiMartino Booth further emphasized the interconnectedness of global economies, focusing on the Chinese economy’s state and its impact on markets like Canadian housing. She pointed out the dual nature of demand and supply in shaping inflation, arguing that both must be considered in understanding economic trends.

Offering an opposing view to the arch of the discourse, Brent Johnson has developed his ‘Dollar Milkshake Theory,’ that explains how the U.S. could benefit from global financial turmoil. The theory suggests that despite the significant debt and economic challenges facing the U.S., global economic conditions will lead to a stronger dollar.

The core idea is that as economic troubles arise worldwide, investors will seek safety in the dollar, seeing it as a stable reserve currency. This influx of capital into dollar-denominated assets, like U.S. treasuries and stocks, will effectively “suck” global capital into the U.S., much like a milkshake straw pulls liquid upwards. This process will strengthen the dollar compared to other currencies.

Johnson’s theory also posits that this dynamic will occur even as the U.S. prints money and accumulates debt due to the dollar’s dominant role in the global financial system and the lack of viable alternatives. The result could be a paradoxical situation where the U.S. benefits from global financial instability, reinforcing the dollar’s supremacy despite its own economic challenges.