Allianz Chief Economic Advisor Mohamed A. El-Erian believes the West needs to pay more attention to the extreme upward trajectory of gold and other precious metals.
In an op-ed published Monday in the Financial Post, the well-known financial commentator said gold has separated from its traditional price movers such as interest rates, inflation, and the dollar.
Gold prices have increased more than 40% over the past year in a relatively linear fashion despite wild swings in expected policy rates, a wide fluctuation
band for benchmark U.S. yields, falling inflation and currency volatility, El-Erian wrote.
More than just inflation
“Some may be tempted to dismiss gold’s performance as part of a more general increase in asset prices that, for example, has seen the U.S. S&P 500 index gain about 35% in the past 12 months,” he said. “Yet that correlation itself is unusual. Others will attribute it to the risk of military conflicts that have seen so many innocent civilians lose their lives and livelihoods, together with massive destruction of infrastructure. Yet, the price journey suggests that there may well be a lot more going on.”
El-Erian specifically mentioned Russia’s continued ability to trade despite sweeping economic sanctions from the West as a result of the invasion of Ukraine in 2022. He referred to the alternative system to Swift as “inefficient and costly,” but said the infrastructure has allowed Russia to maintain economic and financial relations with the rest of the world.
A shift away from the dollar?
“What is at stake here is not just the erosion of the dollar’s dominant role, but also a gradual change in the operation of the global system,” he said. “No other currency or payment system is able and willing to displace the dollar at the core of the system and there is a practical limit to reserve diversification. But an increasing number of little pipes are being built to go around this core; and a growing number of countries are interested and increasingly involved.”
El-Erian concluded, “As it develops deeper roots, this risks material fragmenting the global system and eroding the international influence of the dollar and the U.S. financial system. That would have an impact on the U.S.’s ability to inform and influence outcomes, and undermine its national security. It is a phenomenon that western governments should pay more attention to. And it is one where there is still time to course-correct, though not as much as some would hope.”
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