In the last 50 years, there have been three major surges in gold prices.
The first time was in the 1970s. The historical context at that time was the U.S. announcing that the dollar would no longer be tied to gold, leading to the collapse of the Bretton Woods system. Countries, in order to hedge against risks, frantically sold off the dollar, which had lost its credit backing, and reserved a large amount of gold, resulting in a continuous surge in gold prices. Meanwhile, in the 1970s, there was also the Middle East oil crisis and the U.S.-Soviet rivalry crisis. The world was on the brink of a global crisis, prompting everyone to buy gold frantically, seeking safety first.
The second time was from the early 2000s to 2011. The historical context then was the loss of confidence in the U.S. after the 9/11 attacks. The dollar weakened, and everyone turned to reserve gold. More importantly, in 2007, the U.S. faced a subprime mortgage crisis, leading to a global financial crisis that reminded everyone of the saying: 'In chaotic times, one should hoard gold.'
The third time was the continuous surge in gold prices over the past two years. The reason this time is that the long-standing dollar hegemony system maintained by the U.S. has shown signs of complete collapse. Looking at the situation from 2022 to now, significant events have occurred globally, such as the Russia-Ukraine conflict, the Israel-Palestine conflict, attacks in the Red Sea by Yemen, and the drastic change in the North Korea-South Korea situation. The global order maintained by the U.S. for many years has inevitably shown signs of widespread issues and multiple crises. It is clear to anyone that the Americans are struggling to maintain the situation.
Moreover, it is not only that military control has weakened; the monetary hegemony maintained by the U.S. for decades is also showing signs of instability. The most obvious manifestation is the U.S. debt crisis. According to data, by 2024, the U.S. national debt has risen to $34 trillion. If interest rates are not lowered, the annual interest payments will reach an astonishing $1.2 trillion, accounting for 4% of the U.S. GDP. Following this trend, it won't be long before Americans may struggle to even pay the interest.
All countries are witnessing these changes, so many have chosen to abandon U.S. bonds and turn to reserve gold, which leads to a sharp contraction of the dollar's circulation pool. The dollar's dominance as a world currency is gradually heading towards collapse.
Look at the amazing phenomena happening around the world. Originally, the dollar and commodities like gold were negatively correlated. When you have a positive economic outlook, you would use dollars to purchase a large amount of commodities for production, as you expect good sales. When commodities rise, the dollar would fall. Conversely, if you have a poor outlook, fearing that goods won't sell, you would sell commodities to reserve dollars, leading to a rise in the dollar and a drop in commodities. This was the previous pattern.
But what is the current scenario? The Federal Reserve has repeatedly stated that it may raise interest rates again, which means the economy will have to endure more hardship in the future. According to traditional theories, at this point, commodity prices and gold should drop. But what is happening now? Gold prices are soaring, which indicates a crisis of trust in the dollar globally.
On one hand, there is the concern mentioned earlier that the U.S. may not be able to repay its debts and might default.
On the other hand, currently holding dollars doesn't necessarily guarantee purchasing power. Now, China, Russia, and the Middle East have reached currency swap agreements, and many goods can be purchased with RMB, euros, or even rubles, making reliance on the dollar unnecessary.
Additionally, given the current global turmoil, it is easy to understand why everyone is opting for gold, which appears to be the safest asset for hedging.
Therefore, on the surface, it seems that only the price of gold has risen, but in reality, there is a hidden crisis of trust in the dollar behind it, which is the root cause of the surge in gold prices.
