Gold Prices Surge as Central Banks Diversify Away from US Dollar

The prices of gold are heading toward their historical highest record, fuelled by huge purchases from central banks around the world. In fact, a lot of central banks are in a race to transfer their assets from the US dollar into gold, especially those countries which are already playing buddy-buddy with China. They see it as a politically neutral and secure asset — invulnerable to sanctions.

Gold prices have rallied in the last couple of weeks on heightened buying by central banks, with the rise showing an expanding use of gold as a safeguard in global politics. The importance of the Gold at the moment, globally, was explained by Gita Gopinath, the deputy managing director of the International Monetary Fund, in her address last week.

“After several shocks of a COVID-19 nature and now from Russia’s invasion of Ukraine, countries are now reassessing their trading partners based on economic and national security reasons,” she said, adding that some countries have now started questioning the heavy reliance on the US dollar for international transactions and reserves.

Elaborating further, Gopinath said, “Gold is growing popular as a politically neutral safe asset, even though kept domestically, thereby protecting it from sanctions or seizure.” According to a recent report by the World Gold Council, central banks bought over 1,000 tonnes of gold each year in 2022 and 2023, which amounts to a whopping 25% of global gold demand. In the first quarter of the year, central banks have bought 290 tons of gold, which has set an all-time record for the fastest start ever in history.

The demand for gold is driven in part by the desire to reduce reliance on the US dollar as the world’s dominant currency and underpinning asset. Heavy use of sanction and the dollar by the West to sanction Russia after the invasion of Ukraine has further spurred reducing reliance on the US dollar. Though the US dollar is too entrenched to fall anytime soon and still has a long way before it loses its status as the world’s reserve currency, countries, especially those in alignment with China, are reducing holdings of US dollars in their reserves and increasing shares of other alternatives like gold.

According to Gopinath, since 2015, gold’s share in foreign reserves has been expanding for the countries of the “China bloc.” She did not specify other countries of this bloc, except Russia; she meant that gold’s share in reserves had been growing for those countries. By contrast, the share of gold in the reserves of countries from the “US bloc” has not changed.

The share of gold in China’s foreign exchange reserves grew from less than 2% in 2015 to 4.3% in 2023, said Gopinath. Meanwhile, its holdings in US Treasury and Agency bonds decreased from 44% to around 30%.

It is not only China that is buying a substantial amount of gold. The latest report by the World Gold Council also explained that gold was being bought by Turkey and India in large volumes. Even the JPMorgan analysts believe that central banks are not likely to stop buying gold with a view to sustain the cycle of growth. In this spirit, the price of gold should not be adjusted downwards, and it will continue to be high throughout this year.

The recent gold rush does not really owe its origin to geopolitical causes. The robust US dollar is an invitation for emerging countries that need to buy gold to hedge against the risks associated with currencies. In China, people are also buying gold to protect themselves from domestic economic uncertainties.

The price of spot gold is now at about $2,340 per ounce, a bit lower than the record high over $2,400 per ounce in April. Given the confluence of geopolitical and economic factors driving central bank purchases of gold, a persistent trend should be high gold prices, which reflect a growing wish to find alternatives to the dollar and to switch into safe, neutral investments in the current uncertain global environment.

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