Gold has long been one of the oldest assets held as economic reserves and a store of value, especially during financial crises. However, the global financial system today faces threats due to complex practices related to gold lending and trading based on borrowed gold. For a long time, many countries stored large quantities of gold in their vaults as reserves, but over time, some of these banks began lending gold to gold traders and other banks for interest, with the gold to be returned later. While this system can be economically beneficial, it has created a significant gap in the market. Instead of trading physical gold, trading has become based on paper gold, exposing the financial system to serious risks if claims for physical gold suddenly increase.
One of the prominent risks lies in trading borrowed gold, where gold traders benefit from gold lending by selling it in the markets, sometimes selling it multiple times through futures contracts. Over time, the system has suffered from trading borrowed gold, raising questions about the actual presence of physical gold in the market. This shift to financial speculation on gold instead of trading it as a real commodity threatens the stability of the financial system, especially if demand for physical gold increases unexpectedly. The problem lies in the great ambiguity about the amount of physical gold available in bank vaults. If there is a sudden demand for physical gold from investors, the system may find itself in a major predicament, as it may not be able to meet those claims due to a lack of real gold, similar to a bank run when people try to withdraw their money only to find that the funds are not available.
One potential solution to overcome these risks is to abandon gold as a physical asset and transition to a financial system based on digital or electronic currencies. This step could help avoid a crisis of physical gold shortage, but it requires broad international agreement, which may be difficult at this time, especially since many major countries, such as China, Russia, and some Asian countries, still consider gold an essential part of their monetary reserves. However, the global financial system may face difficulty in eliminating the role of gold and transitioning to a digital currency system, as this shift could cause new problems leading to economic fluctuations and raise questions about the stability and transparency of the financial system in the future.
Despite these risks facing the gold market, this precious metal remains an attractive option for investors. Amid global economic uncertainty, UBS has adjusted its gold price forecasts, raising its estimate to $3,200 per ounce by the end of the year. This adjustment coincides with a similar move by Goldman Sachs’ analysis team, who also raised their gold price forecasts to $3,100. This adjustment indicates prevailing optimism among investors regarding gold prices amid global economic uncertainty, in addition to potential recessions in some markets. Gold prices are expected to reach $3,200 per ounce later this year, supported by strong demand for gold and increased market liquidity.
While gold remains the most attractive option for investors seeking a safe investment amid increasing financial and geopolitical risks, there is still interest in silver, although UBS has maintained its silver price forecast at $35.40 per ounce by the end of the year. However, it noted that silver could outperform gold in the event of an economic slowdown, which might prompt the Federal Reserve to take flexible measures. Goldman Sachs analysts agree with UBS in their view on gold, pointing to increased demand from central banks, which will contribute to a 9% rise in gold prices by the end of the year. If political and economic uncertainty persists, it is likely that gold will continue to rise and remain one of the assets that attract investors during times of crisis.
