By Wong Kon How
Central banks go big on buying Gold since 2022
Gold is more than just a precious metal for industrial and jewelry use—it has become a key asset to hedge against both the USD and inflation. Central banks’ interest in purchasing gold has increased significantly since 2022.
Their appetite for gold accumulation hasn't eased in 2024. Although the third quarter may have slowed compared to 2022 and 2023, it still shows a significant increase compared to 2021 and most years. In fact, the first two quarters of 2024 saw even larger purchases than in 2022 and 2023. The big question is: Why did central banks around the world start increasing their gold reserves sin 2022?
As a hedge against a weaker USD
Has the USD been strong over the past few decades? The U.S. federal debt has reached an all-time high of around $35 trillion. Mathematically, with such a massive expansion of the money supply, the USD’s value should erode over time.
The Dollar Index, which measures the USD's value against a basket of six major world currencies, faced resistance in 2022. If we analyze key periods such as 1985 and 2001 and project forward, 2022 marks another significant turning point, indicating that the Dollar Index may be on a downward trajectory.
Source: TradingView
The inversed relationship between USD and Gold
As seen in the following chart, each time the USD turned bearish, gold appreciated significantly. To understand the value of gold, one should view it not only as a precious metal but also as a currency pair—USD/Gold.
Source: TradingView
As a hedge against inflation - weaker USD leads to inflation
Without a solution to the U.S. debt problem, the USD is likely to weaken further over time. As most commodities are priced in USD, the risk of inflation rising again remains.
My investing strategy
When inflation stood at 7.53% in early 2022, before peaking at 9% in June, my investment strategy was:
· Commodity – Buy
· Asia markets – Accumulate
· US markets – Trade
With a clearer direction of the USD today, my strategy has progressed to:
· Commodity – Hold
· Asia markets – Buy
· US markets – Trade
The search instruments feature on CMC Invest has been instrumental in helping me shortlist the assets we’ve discussed. My search terms include: Dollar Index bearish, Gold ETF, Gold, Silver, and Copper.
This article was first submitted to CMC Markets on December 2024 for publication. Here's the link.
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