The Silent Economy By Dr Hasnain Javed

The Silent Economy By Dr Hasnain Javed

Gold has long been a cornerstone of global economics, with its value deeply intertwined with historical events, geopolitics, and economic factors. The fluctuation of gold prices throughout history has been closely tied to significant global events, providing a barometer for the state of world economies. From the pre-war days to modern times, the value of gold has been subject to the influence of geopolitical tensions, economic instability, and various other factors. Understanding the historical patterns of gold prices offers valuable insights into how global economies have been affected by these fluctuations, and sheds light on the intricate relationship between gold and the world stage.

The Silent Economy is an attempt to analyze the economic impact of gold prices on global economies, particularly from a pre-war perspective. The sudden rise in gold prices is not an isolated event but rather a reflection of broader economic trends, investor sentiment and most importantly the pre-war buying behaviour of countries. Many believe that China is the top buyer of gold, but the current statistics show that other countries, such as India and Russia, have also significantly increased their gold purchases in recent years.

1. Russia: Added 683.31 tons of gold in the last five years, pushing its total reserves to 2,301.64 tons by the end of 2021.

2. Turkey: Added 278.55 tons of gold since 2017, with reserves reaching 394.2 tons by the end of 2021.

3. India: Increased gold reserves from 557.77 tons in 2016 to 754.1 tons by the end of 2021, adding 77.45 tons in 2021 alone.

4. Poland: Purchased 125.7 tons of gold in the last five years, raising reserves to 230.84 tons by the end of 2021.

5. China: Holds the sixth-highest gold reserves globally, maintaining reserves at 1,948.31 tons, constituting 3.3 percent of its official reserves.

Seeing Russia on top might be an eye-opener for many and may make sense of the Russian confidence during its conflict with Ukraine and global restrictions.

The sudden rise in gold prices is not an isolated event but rather a reflection of broader economic trends, investor sentiment and pre-war buying behaviour.

Globally the gold price surged as they reached $2,364 per ounce, hitting record highs for seven consecutive sessions and a year-on-year, gold increase of 16.5%. The major factors contributing to this include the US expectations of Federal Reserve rate cuts, China’s buying of gold to reduce reliance on US dollars (adding 160,000 ounces in March), governments’ reliance since the metal is seen as a long-term store of value and a safe haven during economic and international turmoil. It is this economic resilience of gold as its prices tend to rise when interest rates fall and as a hedge against inflation coupled with the geo-political conflicts that the gold fluctuations are seen in an abnormal pattern. The current geo-political scenario has also revealed an interesting behaviour of countries not allied with the US that may accumulate gold to reduce vulnerability to sanctions. The interest of businesses and countries in this precious metal is also visible from Costco’s entry into the gold market.

Gold is traditionally held during political uncertainty, such as elections in more than 60 countries, including the US presidential election. In 2020, amid the global uncertainty surrounding the COVID-19 pandemic and the US presidential election, gold prices surged to unprecedented levels. During the first nine months of 2020, central banks around the world purchased over 500 tons of gold, marking the highest level of net purchases since 1971. This influx of gold purchases by central banks mirrored the increasing global political and economic instability during that period.

Inflation makes gold more attractive as a store of value, as it threatens the value of financial assets like stocks and bonds. Historical data illustrates that during periods of high inflation, the demand for gold as a hedge against inflation tends to surge. For example, during the stagflation period in the 1970s, when the United States experienced high inflation coupled with stagnant economic growth, the price of gold skyrocketed from $35 per ounce in 1971 to over $800 per ounce by 1980. This significant increase in gold prices during a period of high inflation demonstrates its appeal as a store of value in times of economic uncertainty.

The intricate dance of gold prices on the global stage reveals far more than mere economic shifts; it serves as a silent yet critical feature, predicting behaviours between nations and foretelling major events to come. As nations strategically bolster their gold reserves, we witness a subtle but profound narrative unfolding – one that speaks volumes about geopolitical tensions, economic uncertainties, and the delicate balance of power on the world stage.

The surge in gold purchases by nations like Russia, Turkey, India, and China reflects not just a desire for financial security, but also a strategic positioning amidst a backdrop of escalating conflicts and shifting alliances. These actions, often shrouded in diplomatic rhetoric, speak volumes about the underlying currents shaping international relations and economic landscapes.

Indeed, the fluctuation of gold prices transcends mere market dynamics; it serves as a barometer of geopolitical tensions, economic stability, and global uncertainties. Whether it’s Russia fortifying its reserves amidst geopolitical strife, India diversifying its portfolio amid economic reforms, or China bolstering its holdings as a strategic manoeuvre, each move sends ripples across the global economy, hinting at larger shifts and looming challenges.

In essence, the rise and fall of gold prices encapsulate a silent dialogue – one that speaks of nations’ aspirations, anxieties, and ambitions. As investors and analysts decipher the nuances of these fluctuations, they glean insights not just into market trends, but into the very pulse of our interconnected world. For behind every fluctuation lies a story – a story of nations navigating the currents of change, anticipating the future, and striving to secure their place in an ever-evolving global landscape.

The writer is Foreign Research Associate, Centre of Excellence, China Pakistan Economic Corridor, Islamabad.

The Silent Economy By Dr Hasnain Javed


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