El-Erian says soaring gold is driven by dollar diversification

Mohamed El-Erian says that gold surging to a fresh record reflects how global financial institutions are deliberately diversifying away from the US dollar.

Bullion climbed to its highest mark ever, around $2,758.49, on Wednesday as investors focused on key macro risks — from continued turmoil in the Middle East to the US election — in the weeks ahead. So far this year, gold is up 32%, outpacing the S&P 500 Index’s 23% gains.

“When we try to relate the moves in gold this year to traditional, financial and economic variables — interest rates, the dollar — the relationships have broken down,” said El-Erian, the president of Queens’ College, Cambridge, on Bloomberg Television Friday.

The “secular” move can be attributed to two fundamental drivers, he added.

“One is the slow diversification away from the dollar in the reserves of central banks around the world,” he said. “The other is a slow diversification away from the dollar payment system.”

While the move has been slow, “the bad news is the momentum is building up,” said El-Erian, who is also a Bloomberg Opinion columnist.

Recent events have accelerated the trend toward gold, according to El-Erian.

Chief among them is Russia’s ability to maintain trading relationships and grow even after the exclusion of its major banks from Swift, a global financial messaging service. While recent Swift data shows that the share of dollars in international payments has held relatively stable in recent years, just below 50% and far exceeding other currencies, transactions involving the yuan have risen in recent months.

The other event is the Middle East, El-Erian said, adding that a majority of countries have viewed US as an “inconsistent backer” of human rights and international law.

(By Carter Johnson)