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How China & Russia’s De-Dollarization Could Boost Record Gold Rally

Last Updated September 23, 2020 2:10 PM
Joseph Young
Last Updated September 23, 2020 2:10 PM
  • In U.S. dollar terms, the price of gold has hit a new record high at $2,055.
  • Strategists and politicians fear that the U.S. dollar is at risk due to various macro factors.
  • Russia and China’s acceleration of the “de-dollarization” process puts more pressure on the dollar.

China and Russia are ditching the U.S. dollar at a faster rate. In the process, they are indirectly fueling the record gold rally.

Since July 1, the price of gold has increased from $1,454 to $2,055 at the most recent peak–a gain of 41.3%.

gold dollar
The historical monthly chart of gold against the U.S. dollar. | Source: TradingView.com 

Gold Investors Attribute Much of the Rally to Weaker Dollar

Russia and China’s plans to distance themselves from the dollar-based financial system are not new.

In late 2019, Russia, China, and India were considering an alternative to the SWIFT system. In November, India was looking to join Russia’s System for Transfer of Financial Messages (STFM). 

In the past month, Russia and China have sped up the so-called “de-dollarization” process.  RT, a Russian state-funded broadcaster, said:

After years of talking about abandoning the U.S. dollar, Russia and China are doing it for real.

As a consequence of various factors, including de-dollarization and inflation, the U.S. dollar fell to a two-year low.

The greenback also had its worst month in ten years, which analysts describe as a “relentless” selloff.

Gold investors say that the rapid downtrend of the dollar has positively affected the precious metal.

Peter Schiff, the outspoken CEO of Euro Pacific Capital, says the weakening dollar had been a significant catalyst for gold :

Even as gold builds support just above $2,000 most gold stocks have yet to make new highs for the year. Even the staunchest gold bugs will be surprised by how high the price of gold rises, and how quickly it gets there. A Wile E. Coyote moment for the dollar is fast approaching.

U.S. dollar
Republican Senator Rand Paul voices concerns about the U.S. dollar. | Source: Twitter 

In the near-term, it might get even worse for the dollar.

Analysts in Asia say that the de-dollarization plan has now turned into a “financial alliance”  between Russia and China. The alliance could pressure the already-battered U.S. dollar, as it struggles to regain momentum against other reserve currencies. 

External Catalysts for the Precious Metal

Strategists say there are more fundamental factors that could impose additional selling pressure on the dollar.

Pictet Asset Management’s Supriya Menon believes a declining economy and rising Covid-19 infections would trigger another dollar slump :

There are other short-term factors weighing on the dollar. The U.S. election is one. The worsening infection rates are another.

Video: Goldman Sachs Analyst Emphasizes the Weakness of the U.S. Dollar

Schiff emphasized that there are enough sellers in the market to cause a short squeeze. He said investors’ immediate reaction to gold’s rally shows it as more firepower left:

You know the gold bull has a long way to run when the first reaction traders have to gold finally breaking above $2,000 is to sell. Also, gold stocks still trading below last week’s high when gold was $50 per ounce lower further evidences the wall of worry gold keeps climbing.

It remains to be seen whether the U.S. government will step in to offset concerns about the survivability of the dollar as a global reserve currency. In the meantime, gold continues to show strong momentum.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.