Look to Russia and China for the real reason why gold prices are soaring

A retailer is rare even in this exclusive district of London’s St James’s Street. Among the gentleman’s clubs, shops that sell top-end cigars and shotguns are a number of retailers who have specialized in selling these items.

Sharps Pixley offers a wide range of gold products, from bars that are worth thousands of pounds down to wafer thin slivers for less than £100. Some gold coins are exempt from capital gains taxes, which makes them popular ahead of the budget this week. When I visited the store last week, there were three people waiting to be served while others were checking boxes in underground vaults.

Austin Kiddle, director of Sharps Pixley, says that this niche retail segment has never been busier. “We have had people with suitcases come in to buy gold bars. “We try to discourage this sort of thing, because we can provide armored vans,” said he.

The price of gold has increased dramatically this year. Last week, it reached a record of $2,758.37 per ounce, after gaining 40 percent in the last 12 months. Goldman Sachs analysts and UBS investment bankers believe that the current price of gold is a sure thing and have predicted a price rise to $3,000 per ounce by next year. Investment funds that specialize in precious metals report record money inflows, sometimes in the billions, each month. Share prices for gold mining companies are also surging.

The fortunes of gold have always been determined by inflation, interest rates and geopolitical concerns. It is the “safe-haven” investment choice for investors looking for security. Gold can be a good investment when interest rates drop and returns on certain assets also fall. Gold’s price rises when inflation reduces the purchasing power of a currency. It has earned its reputation among investors who are worried about wars and global tensions as the “crisis commodities”.

Sharps Pixley’s golden days have arrived: an employee examines a rose that has been coated in gold as the retailer enjoys brisk sales. A director said that people have come into the store with suitcases to purchase gold bars.

This boom is different. Something else is driving prices now. Central banks from emerging nations have been the biggest buyers of gold in the last couple of years. Some are anti-American and hoarding gold is seen as a financial safety net. Some people think the days of the dollar as the global currency are fading. Mohamed El-Erian is of the opinion that it is a wake-up for the West. He believes the world could witness a fragmentation in the international financial system, based on dollars. This would erode US power.

According to the World Gold Council, central bank gold purchases reached a record in the first quarter of 2024. India purchased gold each month during the first half year. Uzbekistan was also a major buyer, as were Qatar, Russia and Iraq. China has also increased its gold purchases. Only the central bank in Poland has made significant purchases among western nations.

The Bank of England has a large amount of gold bullion stored in its vaults. India, Russia, and Iraq have all purchased the precious metal in large quantities. Many countries believe it is time to stop the “weaponisation of the dollar” by America.

The antipathy toward America’s involvement in the Middle East is a growing trend. The sanctions imposed on Russia following its invasion of Ukraine and its expulsion from the Swift system of international payments alarmed other countries who feared the same fate if they were found to be on the wrong side of Westerners. In times of crisis, paying for goods with gold or generating money from it could be helpful. Russia will be able to avoid sanctions more easily if they pay in gold.

Many countries believe it is time to stop America’s “weaponisation”, concluding they may be better off using an alternative currency for international trade. Holding more gold may be the foundation of a new payment system.

Vladmir Putin, the Russian president, has been dreaming of creating an alternative currency to the dollar that is backed by gold for years. Last week he was able to make his case. What can we do if we’re not allowed to use the dollar? He told a 3-day economic summit that included some of the US’s enemies, “We are then forced into looking for alternatives.” The BRICS group, which includes Brazil, Russia India China South Africa and South Africa is now expanded to include “BRICS+”, including Egypt, Ethiopia Iran and United Arab Emirates. Turkey, Pakistan and Thailand are all potential members.

Putin unveiled a symbolic note, called “The Unit”, which featured the flags from BRICS nations.

How could it work? It seems that the starting point is to find a way to link a new currency with a basket of sovereign currencies of BRICS member countries. Some have suggested that the new currency could be 40 percent gold and 60 percent currencies. This would not involve giving up national currency nor losing control of the central bank, but could create a stable exchange rate to settle international payments and circumventing the dollar. It would also encourage countries to increase their gold reserves in order to support the value of the currency. Brazil and other supporters say that the key is to create a currency that people can trust.

Lord (Jim) O’Neill is the one who coined the phrase “BRICS”, however he thinks it’s “fanciful”. He believes the idea of a common currency based on the price of gold would be “fanciful”.

Analysts at ING stated in a report published last week that gold is the most likely alternative to the US Dollar for the bloc. Bank estimated that BRICS+ countries increased their global gold holdings between 2008 and 2021 from 5% to 22%. This still only accounted 10 percent of the reserves held by BRICS+ Central Banks, so there is “probably not an end to their potential to increase gold holdings,” ING stated.

Lord (Jim) O’Neill is an economist who was at Goldman Sachs in 2001 and coined BRICS. He finds the idea of a common currency “fanciful”, because the BRICS countries are far from being allies. He said that China and India share a common border but cannot agree on any substantive issues, let alone a shared currency. If you’re serious about it, sharing a currency means giving up the decision-making power of your central bank.

The US has also told other countries that they will not work with Russia to develop a payment system that would allow sanctions to be avoided.

These geopolitical obstacles are unlikely to stop the upward trend of gold prices, but central banks will continue to buy. Even if BRICS+ and its partners are unable to find a way around the dollar, it appears that no one is losing money by stocking up gold.

This is true as much for a central banking institution in the Middle East, Africa or for a private punter walking the streets of London.