Sunway University economics professor Dr Yeah Kim Leng.
PETALING JAYA: Economists believe that gold, which is back lingering around its all-time high in recent weeks, will not be losing its lustre any time soon, due to a “confluence of reasons” which of course included the weakening of the US dollar.
At last look, the precious metal was hovering close to the US$5,545 per ounce level, not far off its historical peak of US$5,608.
Observers pointed out that investors are largely seeking an alternative safe haven to the US dollar, following the reduction in the US Federal Reserve’s (Fed) fund rates.
Economist and director of the Economic Studies Programme at the Jeffrey Cheah Institute at Sunway University Yeah Kim Leng highlighted that in the short term, financial market fragilities have triggered the flight-to-safety response from investors.
“Elevated geopolitical tensions and policy uncertainties add to the risk-off environment in favour of gold as a hedge against uncertainties,” he told StarBiz.
“Meanwhile, rising US economic and fiscal imbalances, shifts away from a US dollar-centric global order, dedollarisation and attempts to find alternative gold-backed currency systems have prompted central banks to pivot away from US dollar assets to gold reserves.
“All these factors have increased the appeal of gold, stoking high demand among retail and institutional investors as well as central banks,” Yeah said.
Moreover, he noted that the precious metal’s rally is also being driven by US dollar weakness caused by monetary easing expectations.
This comes on top of uncertainty over the Fed’s independence, as the Trump administration seeks lower interest rates to reduce debt servicing burdens and stimulate the economy.
Notably, speaking on the Malaysian angle, Yeah remarked: “Since the dollar weakness is a global common factor, it will further boost the ringgit’s appreciation against the dollar.
“Coupled with strong underlying fundamentals, the ringgit will likely continue to be among the best-performing currencies in the region this year.”
More crucially, however, Yeah said that if there is a breakdown of traditional relationships between safe-haven assets, such as rising gold prices alongside a strengthening US dollar or higher real interest rates, this would signal alarm bells.
It could indicate systemic stresses in financial and credit markets, as well as strains in liquidity conditions.
Meanwhile, chief economist at Bank Muamalat Malaysia Bhd Mohd Afzanizam Abdul Rashid, while acknowledging that the greenback’s weakness is the primary reason for the recent rise in prices of precious metals, nevertheless saw a different side to things.
He said: “It appears that US President Donald Trump is unperturbed by the weakening dollar.
“We believe this is because the weakening trend resonates significantly with his policy objective, which is to reduce trade deficits.”
He told StarBiz that a weak dollar will effectively improve the competitiveness of American exports while deterring imports, before concurring that traders and investors are seeking refuge in the precious metals as the US dollar appears to be increasingly unattractive as a safe haven.
However, amidst the furore surrounding gold at the moment, Afzanizam cautioned that as with other financial market instruments, gold prices are also subject to market correction, especially when traders decide to take cash in on profits.
“That said, in light of the fundamental shift in how traders and investors are assessing gold, we believe gold price appreciation has more legs to go,” he said.
Simultaneously, an investment trader with a foreign research house pointed out that as markets price in a more accommodative Fed, real yields fall, reducing the opportunity cost of holding non-yielding assets like gold.
However, she said beneath that cyclical driver is a structural concern of rising US fiscal deficits, ballooning debt issuance, and the long-term sustainability of sovereign balance sheets.
“This has weakened confidence not just in US Treasuries, but in fiat currencies more broadly,” she said.
Providing a Malaysian perspective, the trader believes that a strong gold price indirectly supports the ringgit, as it signals a softer US dollar environment.
She added that Bank Negara Malaysia also benefits from policy flexibility, as the central bank does not need to keep rates overly restrictive just to defend the local note.
“For investors, it reinforces Malaysia’s appeal as a high real-yield, fiscally improving emerging market, especially relative to heavily indebted developed economies,” she told StarBiz.
Elaborating on Yeah’s warning of systemic stress, the trader opined that gold will become a stress signal when it rises alongside falling sovereign bond prices, coupled with elevated volatility in credit markets.
At the moment, she observed that gold’s strength still looks like a measured reallocation away from long-duration bonds and into real assets, rather than panic.
She noted, however, that economists continue to watch key indicators such as US real yields and gold purchases from central banks, particularly from emerging markets.
Despite emphasising that Malaysia is not a stress epicentre, as the country’s government bond market remains relatively stable and well-supported by domestic institutions, she pointed out that global bond volatility can still spill over via foreign flows into Malaysian Government Securities.
She added that this could also create valuation pressure on long-duration assets.
The trader said central banks are not abandoning the US dollar, but they are making small shifts in asset allocation without changing the core structure of their portfolio.
At the same time, they are reducing over-reliance on US Treasuries and increasing allocations to gold and non-US dollar assets.
“Malaysia is unlikely to make dramatic shifts, but modest diversification makes strategic sense.
“Gold provides a hedge against global monetary disorder and balance sheet resilience during dollar volatility,” she said.
“Over time, a less US dollar-centric reserve system could reduce imported volatility for the ringgit and reduce Malaysia’s vulnerability to sudden US policy shocks.”
