Summary of Key Points
In the second quarter of this year, market enthusiasm for "de-dollarization" cooled down, while the US dollar strengthened and gold continued to decline. The main reasons are: increased expectations of Federal Reserve interest rate hikes (which raise the cost of holding gold) and the enhanced attractiveness of the dollar due to demand for safe-haven assets and higher interest rates. De-dollarization is unlikely to be achieved in the short term, as three stringent conditions must be met: the loss of control over US debt, significant advancements in artificial intelligence (AI) in other countries (such as China and Europe), and the presence of large, free financial markets for alternative currencies. Central banks around the world are still purchasing gold, although at a slower pace; Turkey's sale of gold is a special case due to liquidity issues.
1. Gold Prices Continuously Fall: Rising Expectations of Fed Rate Hikes
Why has gold become less attractive? The key reason is that the "opportunity cost" of holding gold has increased. Gold does not generate interest or dividends; profits can only be made through price increases. If the Federal Reserve is expected to raise interest rates (or if markets anticipate this), investing in banks or bonds will yield higher returns, making holding gold less profitable—this is what's referred to as the "opportunity cost." For example, previously, markets thought the Fed would cut interest rates three times by 2026, which drove up gold prices. However, now expectations are that interest rates will be raised by 25 basis points by the end of the year, leading many to sell gold in favor of other income-generating assets. Goldman Sachs has also lowered its gold price forecast from $5,400 per ounce by the end of 2026 to $4,900.
There are two additional factors: a bull market in stocks (which offer higher returns), and Turkey's sale of 79 tons of gold to buy US dollars due to high energy import costs.
2. The Dollar Strengthenes: Driven by Both Safe-Haven Demand and Rising Interest Rates
Why has the dollar become more popular again? This is mainly due to two factors:
1. Safe-Haven Demand: During conflicts like the US-Iran dispute or when the Strait of Hormuz is closed, people seek the safest assets, with the dollar being the global preferred safe-haven currency.
2. Rising Interest Rate Expectations: Fed Chairman Powell has recently signaled a hawkish stance, suggesting possible further rate hikes. Currencies with higher interest rates are more attractive; for instance, depositing dollars in banks yields higher returns than euros or yen. As a result, the dollar index has risen (reaching a high of 101.388).
The euro and yen are under pressure: the eurozone's financial markets are fragmented, and the yen exchange rate is near a critical threshold.
3. De-Dollarization is Difficult to Achieve in the Short Term: Three Conditions Must Be Met
Professor Mishkov emphasizes that de-dollarization cannot be achieved by mere rhetoric; three conditions must be simultaneously met:
1. Loss of Control over US Debt: The amount of US debt must increase to a level where it is considered unsustainable, causing the dollar to lose its status as a safe-haven asset and prompting people to switch to other currencies.
2. Significant AI Development in Other Countries: Countries like China and Europe need to experience an AI revolution similar to that in the US to attract global investors and allow their currencies to replace the dollar as reserve assets.
3. Larger, Free Financial Markets for Alternative Currencies: A currency must have a large, free financial market to become a reserve asset (e.g., the US's stock and bond markets are the largest in the world). The eurozone's markets are too fragmented, so the euro cannot replace the dollar.
Currently, demand for dollars remains strong: the US financial market is large, and global demand for US assets (such as Treasuries and stocks) has not declined, thus maintaining the dollar's position.
4. Central Banks' Gold Purchases: A Long-Term Trend with Slower Pace
Despite falling gold prices, central banks continue to buy gold as part of a long-term strategy to diversify their reserves.
- Overall Trend: According to the World Gold Council, 45% of central banks plan to increase their gold holdings in the next 12 months, and 90% believe global gold reserves will increase. Goldman Sachs expects an annual increase of 50 tons by 2026 (up from 67 tons in 2024, although slower than the 17 tons in 2022).
- Special Cases: Turkey is selling gold due to energy import needs; it may resume purchases once energy prices stabilize. The Chinese central bank continues to buy gold with no signs of stopping.
In summary, in the short term, the dollar strengthens due to rising interest rate expectations and safe-haven demand, while gold declines due to increased opportunity costs. In the long term, central banks' gold purchases will continue, but de-dollarization is still a distant goal—unless the US mishandles its debt, other countries achieve similar AI developments, and alternative currencies have robust financial markets. Understanding these factors helps explain why gold prices have not risen and the dollar has strengthened recently.