Gold’s Unstoppable Rise: The Future of Safe-Haven Assets | Digging into China

Hi, I'm Dong Seong. Welcome to Digging into China, where we explore China in depths to review unique perspectives. Gold prices have recently reached an all-time high, and many attribute this surge to Federal Reserve Chairman Jerome Powell's late August speech in which he hinted at a potential interest rate cut in September. This expectation of lower rates led to a significant decline in the US dollar index which in turn drove gold prices upward. However, I believe this is merely a convenient market narrative for gold's latest recordbreaking rise. Historically, since the collapse of the Bretonwood system in 1972, gold's bull and bare markets have shown a clear pattern. Its price tends to move inversely to economic expansion and a contraction. During periods of economic growth, gold prices decline. During recessions, they rise. This is because investors have long viewed gold as a safe haven asset, one that gains value during times of economic distress or crisis. In contrast, during periods of prosperity, investors achieve higher returns from other assets, prompting them to sell gold in favor of a faster appreciation depre uh investments. This dynamic creates an inverse relationship between gold and US stocks. When economy thrives, the stocks rise and gold falls. When the economy falters, stocks decline and gold rises. A similar inverse relationship has historically existed between gold and the US dollar index. Yet since 2018, this pattern has been disrupted. In the current gold ball market, prices have soared from a low of $1,170 per ounce in 2018 to 3,600 today. A remarkable $26% increase. Meanwhile, the US dollar index rose from 96.1 in 2018 to 108.03 by end of 2024, a 12 point gain. The NASDAQ composite index also climbed from 6,635 points at the end of 2018 to 19,311 points by the end of 2024, a 191% increase. In other words, since 2018, gold, US stocks, and the dollar have all risen simultaneously. This bull market in gold reflects profound shifts in global economy and the emergence of a new investment logic. So what is this new logic? First, the current gold ball market is driven by the breakdown of global capital free flow. Let us examine this from three perspectives. First, since the collapse of gold dollar standard in 1972, global capital markets, particularly stock markets, have moved inversely to gold prices. This was largely due to the free flow of capital between stock and gold market as well as across global capital markets. In strong economic times, capital exited the gold market, converted into dollars, euros, and other currencies and flowed into US and European stock markets. During downturns, capital withdraw from those stock markets with investors converting dollars and euros into gold. This explains the historical inverse relationship between gold, US stock, and the dollar index. However, with the rise of conservative sentiment in American society and the election of Donald Trump, the United States has shifted from being the primary advocate for global economic integration to a leading proponent of economic regionalization and conservatism. As the trade barriers rise, the dollar's role as the dominant currency in international trade diminishes and its global circulation declines with failing trade volumes. With Trump's ongoing tariff policies and high trade barriers, countries with significant trade surplus with the US, such as China, will see a substantial reduction in their dollar inflows, impacting their ability to use dollars for import payments. Second, due to increased domestic energy production, the US has transitioned from a net energy import to a net exporter. Consequently, the US no longer contributes significant petro dollar liquidity to global markets. Third, current US industrial policies encourage domestic investment by American companies and incentivize foreign firms to invest in the US. This increases global demand for dollars. As global trade shifts toward the regionalization, the dollar become a scarce payment instrument for international trade among other nations, breaking the traditional inverse relationship between the dollar and the gold. These trade barriers resulting from regionalization have triggered economic crisis in many countries, making it harder for them to acquire sufficient dollars through trade to pay for imports. This has caused the dollar and gold to move in tandem. When the dollar rises, so does gold. In today's world where global economic integration is a given way to regionalization, economies are no longer developing in unison. Technological advancements and industrial upgrades in western nations no longer automatically uplift the less developed countries that rely on trade surplus with the west. As a result, the global economy is fragmenting into distinct economic zones with the trade volumes between them. significantly reduced. However, due to the legacy of global trade integration, these zones will face short-term crisis and risks. For instance, the economic zone comprising developed the western nations driven by industrial upgrades and technological progress is dominated by service industries with incomplete manufacturing supply chains. During global integration, western manufacturing relied heavily on c on countries like China which maintained trade surpluses with the west. With regionalization and rising trade barriers, these manufactured goods face supply shortages leading to economic imbalances, heightened inflation and other crisis within the region. Meanwhile, countries like a China and Southeast Asian nations which previously enjoyed the large trade surpluses with the West are forming their own trade zones. However, these countries often face excess supply and seek to export as much as possible to other nations within their region, sparking trade frictions. Additionally, their domestic manufacturing over capacity creates a deflationary risks. Thus, in today's transformed global trade landscape, both developed and developing nations face economic risks. Aid these uncertainties, gold as a safe haven asset will undoubtedly attract investor interest. Second, the shift from global integration to regionalization has forcibly disrupted global supply chains. In theory, the global supply chains formed the post World War II and economic integration were the most efficient and cost effective. However, economic behavior is never entirely free of political influence as it is shaped by social system which are determined by political orientations. Thus, political systems inevitably impact economic actions. When China emerged as the primary supplier in global supply chains, its social system fundamentally at odds with western systems, rendering the efficiency and the low costs of economic behavior a theoretical ideal rather than a practical reality. This is evident in practice. The US China trade conflict is not primarily about China's substantial trade surplus with the US, but rather about how China uses that surplus, invest in military development, influencing nations worldwide, and leveraging global integration and the multilateral system to counter the US through what was been termed the China's global spending spree for over a decade. Despite a China's economic China's economy facing a deflationary crisis for over three years, this spending spree persists with ongoing efforts to build anti-US alliances. In this environment, the global supply chains previously established by the west face significant risks. Globalization pursued efficiency and low cost. But the west now confronts a fundamental issue of supply availability. Western economic zones must rebuild a complete supply chain within their regions which will inevitably reduce economic efficiency. As global trade transitions from integration to regionalization, overall global economic efficiency will decline and the growth will slow. This is the second reason gold is a safe heaven asset is in demand. Since the US China trade war began in 2018, major countries worldwide have been preparing for these risks. On September 7, the People's Bank of China reported that its gold reserves reached 74 million ounces by the end of August with the Central Bank increasing its gold holdings for 10 consecutive months. According to Wall Street data, for the first time in nearly 30 years, gold reserves in central banks worldwide have surpassed the US Treasury holdings. This indicates that the major central banks are actively preparing for the risks posed by a fragmented global supply chain. Third, the US is currently the only country likely to benefit from global economic regionalization. This explains why investors are increasing their gold holdings while US stocks continue to rise. The traditional seessaw effect where capital flowed between gold and the stocks no longer holds. As the US rebuilds complete supply chains and will generate a significant investment demand, sustaining robust economic growth over the next decade. Current economic data indicates that Trump's tariff policies have not significantly driven US inflation, demonstrating that a strong demand side player holds a superior position in trade negotiations compared to supply side players. Moreover, technological advancements have significantly improved US production efficiency in recent years, helping to contain inflation. In theory, rebuilding domestic supply chain is in the US is a less efficient investment. However, given the profound ideological conflict with China, most investors view this as the optimal solution, resulting in a simultaneous rise of US stocks and gold, a reflection of both global geopolitical risks and optimism about the US economy. If this coexistence of risks and optimism proves accurate, the US will be among the few countries to benefit from the shift to economic regionalization. While much of the world grapples with transition challenges or even descends into deflationary crisis, the US economy will forge ahead outpacing other nations and regions. Fourth, the decentralization of global payment systems makes gold remmonetization a possibility. The rise of digital currencies challenges the global fiat currency era that followed the collapse of Breton Woods. The decentralization promoted by digital currencies will become a key criterion for future payment systems. Gold's decentralized nature will inevitably attract attention from global trade markets. Although gold is currently nonmonetized, it remains the ultimate payment instrument for central banks, retaining some monetary characteristics. The primary obstacles to gold's remonetization are its divisibility and the limitations in offline payment scenarios as it cannot be infinitely divided or used for online payments like a digital currencies. However, advancement in internet technology are enhancing gold's divisibility, increasing its liquidity and supporting its long-term price growth. Consequently, golden no longer declines when US stocks or the dollar index rise. The traditional seessaw relationship between gold stock and the dollar has been disrupted by sweeping changes in the global economic landscape. As long as the new international trade framework remains unstable, gold will remain a sought after safe haven asset for global investors. Economic and trade volatility will define the next decade, providing the foundation for gold's sustained rise. Furthermore, gold's remonetization enabled by advancements in internet technology is becoming feasible. In the future, gold will combine liquidity, safety, and profitability, making it one of the most attractive asset allocation options for global investors. The views expressed in this video are my personal opinions and reflections on the current state of the global economy and gold market trends. They are not intended to serve as investment advice or recommendations. For personalized investment decisions or financial planning, I strongly encourage you to consult with a qualified financial advisor or professional who can provide guidance tailored to your specific circumstances and goals. Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit the subscribe button right here. It really helps YouTube suggest my video to others. I'll be back with more content soon. Until then, be well.