Amidst BRICS’ Bullion Binge
ETF price has gone up by 63.2% since 2020
Has gained 26% from January 1 to August 31, 2024
Gold prices have reached record highs in 2024, boosting the NewGold Exchange Traded Fund (ETF) on the Botswana Stock Exchange (BSE) as central banks, notably BRICS members, have significantly increased their gold reserves and reduced holdings of U.S. Treasuries.
According to a market report from the exchange, the NewGold ETF has gained 26% from January 1 to August 31, 2024, exceeding its growth rate from the previous year.
ETFs are listed investment products that track the performance of an index such as a basket of shares, bonds or single commodities.
Thus, the NewGold ETF mirrors the performance of the Gold metal in global markets.
“On the BSE, the price of the NewGold ETF has been positively influenced by both the rising Gold prices and the weaker US Dollar against the Pula year-to-date,” the BSE said.
“The price of the NewGold ETF has risen steadily year-on-year since COVID. The ETF price has gone up by 63.2% since 2020.”
Absa Bank was the first to list an ETF, the NewGold, in 2010 at a price of about P83. It has since appreciated significantly, now trading well above P300.
Gold Price soars
Gold prices have soared amid rising tensions in the Middle East, which have heightened concerns about geopolitical instability. This uncertainty has driven investors to seek the safety traditionally offered by gold. As expectations for interest rate cuts in the United States rise, experts say non-yielding assets like gold become increasingly appealing compared to interest-bearing investments.
Persistent inflation has diminished the purchasing power of paper currency, with analysts saying this has led investors to turn to gold as a dependable store of value; Gold is often considered a safe haven for investors in turbulent times.
Central bank binge on gold
Central banks have amassed significant quantities of gold over the past 24 to 26 months, according to Quinten Bertenshaw, Co-Founder and Executive Director of the ETM Group. While speaking at a risk seminar organised by Access Bank Botswana, he said BRICS countries are purchasing gold and “we don’t see it reversing anytime soon”.
World Gold Council shows that BRICS member China added 225 tonnes of Gold to its reserves in 2023 alone. The Gold buying spree from BRICS is spearheaded mostly by China while Russia comes second and India third. Analysts claim that BRICS were stockpiling gold to guard their Central Bank reserves against a possible recession in the US, although some believe America is poised for a soft landing.
Another school of thought is that the bloc intends to back its forthcoming currency with Gold. This strategy, it is believed, would give the alliance a secure launch and help it establish a presence in international currency markets. Additionally, details about the formation of the new BRICS currency, which has yet to be introduced, remain sketchy.
Bertenshaw noted that in 2022 and 2023, central banks acquired over a thousand tonnes of gold, while their purchases of US Treasury securities were reduced.
According to Western media, the value of US Treasury bonds held by foreign investors dropped to $8.02 trillion by the end of January. China and the U.K. reduced their holdings of U.S. Treasuries, with China's holdings decreasing by $18.6 billion to $797.7 billion and the U.K. falling by approximately $200 million to $753.5 billion.
With this trend, Bertenshaw said, “That tells us that the belief in the dollar as the store of value is no longer there”.
However, some remain skeptical about the prospect of widespread de-dollarisation, acknowledging that while certain countries are attempting to move away from the dollar as a store of value, they are uncertain whether this trend will become more widespread.
Erosion of Dollar’s importance?
Bertenshaw is confident that while a complete shift away from the dollar is unlikely, we will continue to see challenges to the current status quo.
One of the most intriguing aspects he addressed is Saudi Arabia's refusal to sign a new petrodollar agreement, which traditionally priced oil in dollars under a 1970s arrangement.
Bertenshaw argued that Saudi Arabia's decision not to sign the new agreement is significant because, as the world's largest oil producer, it plays a crucial role in enabling the U.S. to fund its debt expansion by pricing oil in dollars.
Dollar carry trade waning
In his address, he highlighted the Yen's recent surge against the dollar. Traditionally, in foreign markets, investors borrow in countries with low interest rates and invest in those with higher rates. As a result, they tend to sell the Yen and buy the Dollar.
Bertenshaw observed that this dynamic is shifting as the Bank of Japan begins to raise interest rates for the first time in decades, while the U.S. adopts a more dovish stance.
“That has caused massive carry trade. The carry trade where everyone wanted to hold the dollar because of good yield has started to wine down.”
When asked about the potential removal of the dollar from the financial system, Bertenshaw believes this is highly unlikely and would take decades to accomplish. He acknowledges the emergence of alternatives, noting that "BRICS is a strong contender."
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