The World Gold Council, which represents the precious metal industry, reported that central banks last year added the most gold to their reserves since 1950, when records began, the BBC reports.
Indeed, Russia’s invasion of Ukraine shook the global order and the financial authorities they are leading a shift in what appears to be a move away from the US dollar.
To name a few, the central banks of large economies such as China, India or Brazil, among others, are buying gold to replace the dollars in its reserves at the fastest rate recorded since the war.
Some analysts place the start of this trend even before the invasion of Ukraine, but most point to the ease with which the United States imposed sanctions on Russia when the conflict began as one of the triggers.
“Western nations they froze some of the remaining assets due to the invasion of Ukraine in 2022which incentivized central banks around the world to further increase holdings of fungible gold,” explain Bank of America global commodity analysts.
frozen reserves
For them, the global economy seems to be moving towards a multipolar world and they cite the fall of the US currency as data in official foreign exchange reserves from around 70% two decades ago to 58% today.
Why central banks are buying gold at the fastest rate in 80 years
“Russia, now the most sanctioned country in the world, is a good example, since it is among the largest de-dollarizers and buyers of gold in recent years,” they add.
This reaction is rational. The United States was able to freeze Russia’s $300 billion reserves because they were in dollars. For many analysts, the global economy seems to be moving towards a multipolar world.
“After the US sanctions after the Ukraine war, countries have tried to reduce their exposure to potential sanctions in the future. This prompted a currency buildup in both gold and Chinese renminbi.”points out to the BBC Omar Rachedi, associate professor in the Department of Economics, Finance and Accounting at ESADE.
Punctually, private companies trading with Russia are also potentially vulnerable to US sanctions.
Since the beginning of the year, gold has shown stellar performance. So far this year, the precious metal is up more than 10% in dollar terms.
This is why the increasingly multipolar world is also an idea in the head of Carsten Menke, head of research at the investment firm Julius Baer.
Central banks like gold because it is expected to hold its value in turbulent times and, unlike currencies and bonds, it does not depend on any issuer or government.
gold too allows central banks to diversify beyond assets such as US Treasury bonds and the dollar.
Central banks like gold because it is expected to hold its value in turbulent times.
“The reasons why central banks are accumulating gold vary, but probably the main one is that they need to diversify their reserve assets,” Professor Lawrence H. White, from the Department of Economics at George Mason University, told the British outlet.
“China, for example, has been buying gold and, at the same time, selling part of its large portfolio of US Treasuries.. Holding gold instead of dollar assets is also a way to reduce exposure to dollar depreciation risk,” she states.
But “the dollar remains the dominant currency for international payments, and neither the euro nor the yuan are likely to take its place,” White believes.
Diversification against interest rates
And it is that the rise in interest rates has also influenced the distance from the dollar in many economies
“The diversification needs of central banks are further exacerbated by the fact that their holdings of US Treasury bills have lost value due to the interest rate hikes made by the Federal Reserve of that country,” says Rachedi.
Therefore, the shift towards assets other than US currency -and especially US Treasury bills- has been a factor that has also driven diversification, explains the ESADE professor.
For any Latin American economy whose debt is in dollars, the rate hike has also been a setback.
The Brazilian president, Luis Inácio Lula da Silva, also recently spoke about the dominance of the dollar.
The Brazilian president, Luis Inácio Lula da Silva, also spoke recently about the dominance of the dollar.
In a speech delivered during a recent state trip to China, The president urged the BRICS countries -Brazil, Russia, India, China and South Africa- to develop a new currency and move away from the dollar.
“Why can’t we trade our own currencies?” he asked, quoted by The Financial Times. “Who was the one who decided that the dollar was the currency after the disappearance of the gold standard?”.
Speaking at the Shanghai New Development Bank, Lula called on the BRICS nations to establish a common currency with which they can transact.
A proposal that comes a few months later of the announcement of Brazil and Argentina to articulate a common currency called sol.
“It’s an old ambition. Nobody wants to be dependent on a currency they can’t control, but the reality is that no one can live without it. The broad hegemony of the dollar will be assured as long as there is no rival of the same magnitude,” explains Gonzalo Toca, an analyst at the Spanish think tank Esglobal.
Hegemony
“We are talking about the currency of the world’s leading economy and the currency of the main promoter of globalization and the international monetary system as we know it. For this very reason, the institutional architecture favors it,” he says.
“That said, the overwhelming hegemony that the dollar has enjoyed has obviously started to weaken with the rise of the euro and the yuan. And it will continue to weaken, in the coming years, while they gain weight as reserve currencies and payments,” says Toca.
And remember that relations between Washington and Beijing, on the other hand, while not being good, are now less tense than during the “trade war” that former US President Donald Trump decreed.
For Professor Rachedi, the main challenge to the global dominance of the US dollar may come from the Chinese renminbisince China has begun to close oil contracts with Gulf countries at prices in renminbi and not in dollars.
Gold Rush
In 2019, the Bank of England froze the Venezuelan government’s access to gold reserves, sparking protests among Maduro supporters.
In addition, the massive effort of the Belt and Road Initiative comes with the disbursement of contracts between China and countries in Asia, Africa and South America, which are priced in renminbi and not dollars.
“However, as long as China does not provide a well-protected environment for investors and allows the government to directly control financial markets and possibly seize any financial accounts, the Chinese challenge to US dominance would not be that important,” he said.
“As long as the United States manages to maintain free financial markets with a stable rate of inflationtheir dominance will be here to stay for the next decade or so,” he predicts.
