Gold prices reached rock bottom in 1999 when the Bank of England sold half of the U.K.’s national gold holdings. Gold fell to $252.50 per ounce as U.K. officials wrongly believed the precious metal had become a barbarous relic of yesteryear. Ironically, London is the hub of international gold trading, and the country that regulated the global market sent the international community a bearish message about gold’s future. The joke was on the U.K. as few countries followed their lead, and gold prices took off on the upside, reaching a series of new record highs over the next two and one-half decades. Gold’s most recent high was $2,072 per ounce in 2022 and 2023, over eight times higher than the 1999 low.
Changes in the global financial system could propel gold even higher over the coming months and years as a bloc of nations are moving toward introducing a currency that will incorporate gold.
A double-top stopped gold’s momentum
The continuous COMEX gold futures contract rose to $2,072 per ounce in May 2023, which was a bearish event.
The twenty-year COMEX gold futures chart highlights the $2,072 continuous contract double top formation, a bearish pattern that led to another correction that took gold below the $1,900 level in August 2023. The reversal pattern stopped gold’s bullish momentum dead in its tracks as higher U.S. interest rates weighed on the precious metal.
Meanwhile, gold stabilized over the past weeks with the continuous contract trading around the $1,950 level on September 1 and active month December COMEX futures above $1,965 per ounce.
Sanctions on Russia led to a temporary gold standard
When Russia invaded Ukraine, U.S. and European sanctions on Russia choked the Russian economy. The Russian central bank briefly turned to gold to provide some backstop for its currency, temporarily lifting the ruble-U.S. dollar exchange rate.
The chart of the currency relationship illustrates the plunge to $0.007570 during the invasion in March 2022 and the 158% rise to $0.0195470 in June 2023. In March 2022, Russia’s central bank announced it would pay a fixed price of 5,000 rubles per gram of gold from March 28 through June 30, 2022. The statement and experiment lifted the ruble and could have sent a message to Moscow and its allies.
Sanctions sent a message to other countries
As the world’s reserve currency, the U.S. dollar has been the leading foreign exchange instrument for cross-border payments for decades. The February 2022 “no-limits” alliance between China and Russia created a bifurcation of the world’s nuclear powers. Sanctions on Russia sent Beijing a message as it continues with reunification plans with Taiwan. The sanctions made the U.S. dollar a potential impediment to future world trade.
China and Russia cannot afford to depend on the U.S. currency, changing the reserve currency’s role in the worldwide financial system.
BRICS countries are working on a non-fiat currency to challenge the U.S. dollar
The BRICS countries include Brazil, Russia, India, China, South Africa, and their allies. China’s position as the second-leading economy makes Beijing the leader of the BRICS bloc.
Over the past months, the bloc has been working to implement a BRICS currency alternative to the U.S. dollar for cross-border payments. While a BRICS currency is on the horizon, China and India have already moved toward de-dollarization, purchasing crude oil from Saudi Arabia and other OPEC members in yuan and rupees.
China and Russia are leading gold-producing countries. Over the past years, Beijing and Moscow have increased holdings by purchasing gold in the international bullion market. Moreover, the producing countries have likely vacuumed domestic output, increasing reserves. As strategic reserves are a national security matter in China and Russia, the level of reserves is not transparent, but it is safe to say they have dramatically increased. A BRICS currency could have gold as a backstop, making it attractive versus the U.S. fiat dollar, which derives value only from the full faith and credit of the U.S. government that issues the legal tender. Over the past weeks, Fitch lowered the U.S. credit rating from AAA to AA+. A challenge to the U.S. dollar could cause a decline in its dominance in the global financial system. Moreover, a gold-backed BRICS foreign exchange instrument could turbocharge gold’s role and significantly increase the dollar price.
Gold’s best days could be on the horizon
The bull market in gold began in 1999 at $252.50 per ounce when the U.K. government made a tragic error, thinking the precious metal was a relic. Over the past twenty-four years, the trend in gold has been decidedly bullish.
The chart dating back to the 1970s shows a pattern of higher lows and higher highs in gold. The most recent double top caused a correction but did not impact the bullish path of least resistance.
Time will tell if a BRICS currency lifts U.S. dollar gold prices. Meanwhile, gold’s role in the financial system is rising. Central bank buying and holdings validate gold as the ultimate currency and hard money. While governments can issue fiat money to their heart’s content, the worldwide gold stock is limited. The U.S. national debt, inflation, and the potential for an emerging currency that uses gold to derive value could cause the bull market to climb to higher highs over the coming years. A BRICS currency should be a bullish development for gold and gold-related assets.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
