The Shifting Dollar Confidence And The Rise Of Gold: Why The Precious Metal Is Outperforming The World’s Reserve Currency

September 8, 2020

The global pandemic has plagued the economy with uncertainty for nearly half a year. Despite early reports of a miracle vaccine, doubts and re-infections have once again cast skepticism on returning to what life once was. The unpredictability of the pandemic coupled with the mounting tensions between the US and China have seesawed asset classes—sinking the world’s reserve currency, the US dollar to a two-year low. In contrast, gold prices soared past US$2000, reaching an all-time high as concerns of the spread of the virus weighed on the world. 

Lauded as the recession-proof asset, many have turned to gold to hedge against today’s uncertain future. Yet, with the inaccessibility and cost of physical gold, many are excluded from enjoying the benefits of the precious metal. This has prompted a 40 to 50 percent rise in demand as retail investors turn to digital gold as an alternative investment to enjoy its ease and affordability. As the demand for digital gold continues to rise, can the safe-haven asset replace the US dollar as the world’s reserve currency?

The Shaky Dollar: Is the World’s Reserve Currency Losing its Clout?

Marked against an uncertain economy, confidence in the US dollar has been shaken as the global economy continues to spiral. With weak outlooks expected, experts anticipate a bearish forecast for the US dollar with its interest rates unlikely to increase, given that the target inflation rate was far from the Federal Reserve’s projection and their unlikelihood of suppressing inflation. 

Adding to its fragility, the US$2 trillion stimulus bill that was handed out to US citizens in March was already an overabundance of circulating money supply in the economy, weakening the greenback. However, the world’s largest hedge fund, Bridgewater Associates, still believes that the US would still need more than US$1 trillion in additional stimulus to relieve the fragile economy. Taking into account the weak dollar, another huge stimulus would likely cause further pullback on the dollar, weakening the world’s reserve currency even more. With the US’s weekly jobless claims falling just below a million for the second time since the COVID-19 pandemic, economists still have apprehensions of a strong economic bounce back. Amidst the widening US budget deficit, many have begun speculating the inevitable dollar crash, which could spark a surge in gold’s rise.   

Gold Gaining Ground

Being largely uncorrelated with monetary markets and economic fluctuations, gold’s recession-proof characteristic is shining in today’s grim economic outlook, prompting retail investors turning to the yellow metal to diversify their portfolios. The yellow metal’s outlook is so shiny that experts have speculated that it has the potential to surge by more than 90 percent, hitting US$4000 in the next three years if central banks continue its trajectory of large monetary stimulus. 

In addition to rising demands, disruptions to the gold supply chain have been another prominent factor in raising the price of gold. As COVID-19 grounded ships and flights that are paramount in connecting trading hubs with vaults and refineries, gold suffered an unfortunate supply shortage, adding to its hiking price. With gold prices rising by 28 percent this year, gold miners are finding opportunities from the gold rally to pay debts, increase dividends and spend less money on finding new gold, further curbing the gold supply. While COVID-19 is a key culprit for the recent decrease in gold supply, gold production from mines has already dipped year over year due to various factors ranging from increased seismic activity to lower gold grades and recovery rates. 

Digital Gold’s Shiny Future

Despite gold’s benefit of hedging against economic uncertainties, the precious metal tends to be largely inaccessible and expensive where only the elite few have access to enjoy its gains. Digital gold has been gaining ground in democratising access to the yellow metal, championing financial inclusion by breaking down the barriers to investing and benefitting from gold. Digital gold fractionalises ownership of a gold bullion, allowing investors to purchase in increments, making digital gold much more accessible to everyday retail investors and digital asset novices. With the increasing number of players entering the gold asset tokenisation space, the growth potential of digital gold is extensive. 

As industries continue to be weighed down by the fragile economy and waves after waves of new infections spread, the crisis could fuel a “de-globalisation” effect on the global economy, making assets like gold that are largely uncorrelated to the monetary markets more relevant than ever. While it’s hard to predict that gold will replace the greenback as the world’s reserve currency as it would depend on future economic movements and governmental policies that are now unknown but, its strong gains, relevance and accessibility of digital gold have made the precious metal a strong contender amidst today’s uncertainties.

Courtesy of: Shaun Djie, Co-Founder and COO of Digix


India is perennially the world’s largest gold consumer.
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