Gold shimmers as dollar loses sheen

Analysis


While no major currency is likely to replace the dollar anytime soon, the need for an alternative is clear, and growing. China among others is considering how to diversify its more than $2 trillion in foreign exchange reserves; talk of using other currencies to trade oil or commodities continues to circulate.

Supply constraints mean there is no chance of a full revival of the gold standard era, when currencies were pegged directly to gold, but investors say gold’s duel role as both currency and asset make it an almost irresistible buy for years to come as financial geopolitics add risk into global markets.

Gold plunged almost 20 per cent in October 2008, taking a hit when investors dumped assets across the curve for cash as liquidity dried during the height of the credit crunch. But in comparison to other asset classes gold did well, with broader commodities and equities hitting multi-year lows in the unwinding of complex positions built over the past several years.

It is also seen as a simpler investment after huge losses on sophisticated financial products endangered the global financial system and plunged the world deep into recession.

Wider investor base

After the October 2008 plunge, gold returned to the upward momentum that had carried it to a record high in March 2008, defying the downtrend in most other assets. A big part of gold’s gains have been attributed to the declining dollar.

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