Commodity Watch: Gold vs The Dollar

AHMAD AL-SATI
PORTFOLIO MANAGER

Ahmad is the President and portfolio manager for Gemcorp Capital Advisors LLC, based in New York. 

Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser. 

Per Triffin’s Paradox, a country with a reserve currency must balance local needs with international needs. Issuing more debt and maintaining a trade deficit to keep the supply of the reserve currency flowing can result in domestic pressures on a country. In turn that results in a fundamental tension within its own borders. At some point, the burden outweighs the benefits. The US may well be there. 

As the world watches, other countries will want to hedge their reliance on the USD as a reserve currency. Gold prices are illustrative here. In the past 18 months gold prices have increased by over 50% during period of high dollar (not typical) and low dollar (more typical). The primary driver behind these price increases has been central banks (generally inelastic buying) as they bought 1,000 tons of gold per year - 2.5x the historic average. This buying spree seems to be part of a larger effort to pivot away from the USD. It started perhaps when Obama weaponized SWIFT against Russia over Crimea and Mnuchin threatened China with SWIFT expulsion if they didn’t sanction North Korea (gold is up 3x since). Trade wars may accelerate the trend.

That said, governments are not shipping gold back and forth to buy soy or tee shirts, so why are they hoarding it?

To supplant or supplement the USD system, other countries must create the necessary payment rails and infrastructure. The payment technology is relatively easy. The BRICS+ are already building BRICS Pay to facilitate cross-border payments and China has CIPS for yuan transactions. The real issue is convertibility. Sellers don’t want to be paid in a currency that is not easily convertible to their currency or USD, which is how most countries pay their obligations.  As a result, countries with trade surplus must hold USD to meet those convertibility requirements (think China). Gold changes everything. If a currency is generally convertible to gold, then countries will own less USD, and gold reverts to its reserve currency role. That solves the convertibility issue and lowers the need for USD reserves.

For investors, diversification is key. A USD glut (as countries use it less) means lower USD purchasing power (inflation in the US) and potentially higher treasury yields. A lower USD may also make US investments less attractive. Bloomberg is already reporting that that non-US investors’ returns suffered last month as the USD declined in value, which increased their hedging costs and lowered their returns in their home currencies. Usually, USD strengthens during crises offsetting losses. Commodities become more important as an inflation hedge and geopolitical mitigant. It also means that non-US assets and markets may become more attractive for US investors. A new opportunity may be on the horizon.

The following is an extract from a LinkedIn post by Ahmad Al-Sati from 27/04/2025.