Why The World Is Swapping Dollars for Gold

Market Update - Monday, 02 Feb

Over the weekend, the budget was announced, and most have likely already reviewed the broader details. From an institutional and fiscal perspective, the government appears to have performed well by staying on the current path. Any slip in the fiscal deficit would have caused significant alarm for the economy and from the perspective of Foreign Institutional Investors, but thankfully, that did not happen.

Outside of the equity markets, there is significant dislocation in precious metals. Silver dropped approximately 40% in just two or three days, and gold fell nearly 20%. While these metals had been rising rapidly and a sharp correction was warranted, the severity of the fall was unexpected.

There is currently a lot of outcry regarding the application of additional STT on futures and options, though the cash market was fortunately left untouched. Views on this are divergent. Some believe it is responsible for the government to prevent the next generation from being sucked into derivatives trading, similar to the ban on online gaming. However, speculators will always find ways to trade.

Another concerning situation has arisen regarding Sovereign Gold Bonds (SGBs). Started in 2015-16, these were intended to be capital gains tax-free upon maturity. Neither the prospectus nor the RBI FAQs mentioned that buying them from the secondary market would change this status. Now, the budget states that from the 1st of April 2026, those who bought bonds from the market will be taxed.

• Looking at the data for the 2nd of February, the market has been falling since early January. After a sharp 2% drop yesterday, we recovered about 1% today.

• Currently, momentum trends for Nifty Junior, Mid Caps, and Small Caps remain negative despite today's small jumps.

• Bank Nifty gained 0.35% and remains near all-time highs.

• Gold has lost its short-term trend, though mid and long-term trends remain positive despite the 20% fall. There is currently a massive gap between the "paper" market and physical prices.

• While gold is quoted at 1,47,000 per 10 grams on exchanges, physical market prices are much higher, around 1,50,000 to 1,60,000.

• Silver shows a similar gap. This suggests a disconnect where the paper market may eventually face a reckoning.

Other Market Triggers

• Reliance, Mahindra, ITC, and L&T led the heat map, while some IT stocks and Axis Bank were down.

• In the mover of the day segment, Latent View Analytics rose 9.3% on strong profits.

U.S. Market Updates

• Conversely, the US market saw a big down day with the NASDAQ and Russell 2000 falling.

• Stocks like AMD, Intel, and Meta were all red. Regarding the JP Morgan gold forecast, many believe large banks hold short positions and drive prices down to cover them.

• Some of these may be part of the Weekend Investing US stock strategy, though these are not recommendations.

What to watch next ?

• It is too early to say a bottom has been formed, but the bounce shows that investors are not extremely distressed by the budget.

• The budget is being viewed through two lenses: investors looking at the macro economy see it as positive, while the middle class may see it negatively due to the lack of tax sops and increased STT.

• Both gold and silver are currently seeking a bottom, and a base may form in the next couple of weeks.

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What To Read This Week ?

The Great Pivot: Why Central Banks are Swapping Dollars for Gold

For the last 50 years, the global financial system operated on a simple loop: the world sent goods to the US, and the US sent back paper (Dollars). But the tides are turning. We are witnessing a "once-in-a-century" structural shift in how nations store their wealth.

The Death of the 'Paper for Goods' Cycle

Since 1971, the US Dollar has enjoyed "exorbitant privilege." The US could print currency, and other nations would gladly hold that debt in the form of Treasuries. However, that cycle has broken. Major players like China and Russia have aggressively pulled back, and even neutral players like India are diversifying.

By the Numbers: The Rise of the Barbarous Relic

The data tells a clear story of migration. Global gold reserves, which had dipped to a mere 10% of total holdings, have already climbed back to roughly 25%.

Experts suggest this is just the beginning. We could see gold reserves climb to 30%, 40%, or even 50% as central banks lose the appetite for holding weakening fiat debt.

The Debt Trap and the "Weak Currency" Incentive

With fewer foreign countries willing to buy US debt, the US is forced to buy its own debt (monetization). This creates a vicious cycle:

1. Supply vs. Demand: Less global demand for bonds means the US must offer higher interest rates to attract investors.

2. Currency Pressure: Constant printing devalues the currency.

3. The Incentive Gap: Investors need a massive "premium" to hold debt in a weakening currency, making gold a much safer harbor for long-term value.

Diversification is No Longer Optional

While short-term market volatility will always exist, the Macro Trend is undeniable: the world is moving back toward hard assets. For the individual investor, this isn't about "timing the market"—it's about aligning with the world's central banks.

If the biggest financial institutions on earth are swapping paper for gold, your portfolio should probably reflect a similar diversification.

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