The Dollar Has Problems: Billionaires Have Found an Alternative to It

As the price of gold rises, the global financial world and the media community are beginning to realise that those investors, many of whom are representatives of the super-rich families of the western world, who bought the yellow metal for any money back in April and May, are again one step ahead of all other participants in the financial markets.

On Friday, the price of gold for immediate delivery in New York rose to $1901.3 per troy ounce — a multi-year record, and many experts believe that the storm of the level of $1920, i.e., the highest price of gold recorded ever, is just a matter of time. Explanations for such a high popularity of the main competitor of the dollar (and gold is a monetary metal, i.e., a metal whose value is due to its monetary properties, rather than industrial use) are put forward in a variety of ways: from the general fleeing of investors from risk in the context of the coronavirus pandemic to concerns related to global (as well as purely American) political risks, which traditionally make precious metals a very attractive investment.

It is worth recalling that on May 25th, we wrote that “for some reason, despite the seemingly successful fight against the economic crisis performed by the Federal Reserve and its dollar printing press, such authoritative American banks as JP Morgan and Goldman Sachs want to recommend their clients to invest in gold instead of dollars”. Against this background, some Russian economists and experts who persistently promoted the thesis in the Russian information space that gold and other monetary metals are no longer protective assets, and that Russia is now allegedly in a terrible situation due to the fact that there is a lot of gold and relatively few dollar instruments in our country’s gold and foreign exchange reserves, which is associated with obvious sanctions risks, looked quite strange.

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Practice has shown a completely different picture — in the sense that at the moment the supporters of investment and savings with the use of gold turned out to be right, and it should be noted that among those who prefer gold to green paper, there are various types of investors, ranging from American banks JP Morgan and Goldman Sachs, continuing with the central banks of Russia and Hungary, and ending with the billionaire financiers Jim Rogers and Paul Tudor Jones.

The Bloomberg agency notes that so-called smart money (how funds and investors with large wallets and the most accurate information are traditionally called in financial markets) now continue to prefer gold, despite the seemingly excellent results of the American stock market, which in theory should have distracted them from spending money on gold bars.

Analysing the results of a survey of sovereign wealth funds and central banks carried out by the financial giant Invesco (the company itself manages approximately $1 trillion in assets), Bloomberg reporters came across an interesting contrast between the attitude of this smart money to financial assets and the precious metal:

“Contrast the mistrust of equities with a rising enthusiasm for gold. Its performance this year has been spectacular. Gold bugs applaud the precious metal as an insurance policy against financial fiddling by monetary authorities that will stoke runaway inflation one of these days; naysayers deride it as nothing better than a pet rock. But central banks have certainly been putting more of their reserves into gold in recent years, the Invesco survey shows. Central banks have been increasing their allocations to gold in recent years That interest has further to run. Some 18% of central banks plan to increase their gold holdings in the coming year, according to the Invesco report, while 23% of sovereign funds intend to boost their exposure.”

Despite the fact that financial markets are highly volatile under conditions of high uncertainty and prices of any assets, including precious metals, can fluctuate sharply and in an unpredictable direction, some representatives of major financial structures point out that the factors contributing to long-term price growth have not gone away.

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“George Gero, managing director at RBC Wealth Management, told MarketWatch that gold’s upward momentum is ’caused by perfect storm of pandemic headlines, benign dollars and interest rates, as global economic stimulus grows. This may last longer than usual cycles’ as the pandemic casts a shadow on Europe, South America, the Far East, as well as the U.S., he said.”

It is noteworthy that the narrative has changed: if in the past any global crisis and accompanying instability in financial markets, as well as the growth of various economic risks provoked a mass “fleeing to the dollar”, now the situation looks completely different. And if we look at the exchange rate of the dollar against other world currencies, including the Euro and the Swiss franc, we can see that the US currency is at or near “covid lows”.

I.e., it turns out that investors mostly “flee from the dollar” and choose other safe havens for their capital. Now in the American media, this unusual phenomenon is usually attributed to the fact that the US could not really effectively cope with the coronavirus epidemic – and this is a valid, but absolutely insufficient explanation of the situation. For a complete picture, it should be taken into account that until recently, the iron political stability of the US (in the sense of confidence that America is governed by the same “deep state”, regardless of the specific name of the President) provided additional stability of the dollar itself and contributed to its attractiveness.

Now the US is in a sluggish civil war or “low-intensity civil war”, and the federal centre has to use its own law enforcement to restore order in rebellious cities like Portland or Atlanta, not to mention the fact that after the presidential election, this civil war may well become truly bloody and large-scale. And against this background, the actions of billionaires who receive gold bars for any amount of money, exchanging their dollars for them, look like a very far-sighted decision, hinting at many political risks that journalists, analysts and fans of everything American have yet to realise.

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Ivan Danilov

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