Two themes pushing Gold and Silver: De-dollarisation & Recession

By Dr. Renisha Chainani, Head- Research, Augmont – Gold for all

Gold and Silver have been on an unstoppable run, skyrocketing from the $1800 (Rs 55000) level at the beginning of March to above $2060/oz (Rs 61000) – notching up a spectacular gain of over 12%, in the past 40 days. While Silver has whoppingly risen 30% from $20 (Rs 61500) at the beginning of March to $26 (Rs 77500) this week. The question is what is the reason for such an impressive rally in the last 40 days and is this sustainable?

The answer to this is two factors are pushing the precious metals prices: Recession concerns and De-dollarization concerns that have emerged with the cracks in the banking system in March. Markets expected recessionary risks to resurface following the banking system crisis, which failed several prominent banks ranging from Silicon Valley Bank to Signature Bank, as well as the disorderly collapse of Credit Suisse. Fears have been raised that banks will be overwhelmed by waves of withdrawals, or “bank runs,” resulting in stricter lending conditions for borrowers, triggering a “global credit crunch” and, eventually, a recession. Minutes from the Federal Reserve’s March Monetary Policy Meeting were released this week, and for the first time, policymakers predicted a “recession” starting later this year, with a recovery by 2025 at the earliest.

The second factor is de-dollarization or the reduction of the dollar’s dominance in global markets. For many years, the US dollar has been the dominant currency in international trade, influencing the global economic landscape. The US Federal Reserve’s constant money printing (its balance sheet has grown from $0.9 trillion in 2007 to $8.34 trillion at the end of March 2023), has fueled inflation and cast doubt on the dollar’s value.

However, recent trends show that countries are becoming less reliant on the dollar. This de-dollarization has gained momentum in recent months, particularly since the Russia-Ukraine conflict began in February. The State Duma’s deputy chairman, Alexander Babakov, was quoted as saying last month that the BRICS nations are working to create an alternative payment system to the US dollar and the euro.

Countries are increasingly trying to reduce their US dollar reliance. Examples include

• The BRICS group, which includes Brazil, Russia, India, China, and South Africa, is developing a common currency to replace the US dollar and challenge America’s dominance. The new financial agreement could be seen as early as August when the countries meet in South Africa for their annual summit.

• Russia is turning to China’s yuan amid geopolitical tensions, as evidenced by China and France’s yuan-settled LNG trade, as well as China and Brazil’s agreement to trade in their respective currencies. Brazil has already started to take yuan-based investments and trade settlements.

• India, too, has been attempting to wean itself off the dollar. Recently, 18 countries, including the United Kingdom, Germany, Russia, and even the United Arab Emirates, were granted trade permission.

• India and Russia use the Rupee-Rouble trade mechanism to settle trade debts in rupees rather than dollars or euros.

The Dollar Index has been suffering from both of the factors – Recession and de-dollarization. The Dollar Index is about to break down at 101, and if it does, it may fall to 95-96 levels. Whatever happens after 2023, the current macroeconomic environment is fueling a “perfect storm” for precious metal prices.

Whatever angle you take, one thing is certain. Precious metals are currently everyone’s favourite trade, and this trend is expected to continue for the rest of the year. The environment remains bullish, with Gold and Silver prices expected to rise 20% from current levels in FY 2023-24 to $2400 (Rs 70000) for gold and $30 (Rs 90000) for silver.

For a recession-proof portfolio, one should allocate at least 20% portfolio to Gold and Silver. And the best way to stay invested in Gold and Silver in a new financial year is to invest 50% in lumpsum at current prices on Akshaya Tritiya and divide the rest 50% through the Systematic Investment Plan (SIP) every month. Augmont- Gold for All offers both of these investment alternatives through its products like Augmont Digi Gold/Digi Silver and Augmont Gold SIP/ Silver SIP.









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