In the first quarter of 2019, gold demand from central banks has peaked in the last six years. At the same time, more and more countries are reducing the share of the dollar in their international reserves. What lies behind this strategy and how it could influence the existing financial order?
According to the World Gold Council (WGC), last year central banks around the world bought 651.5 tonnes of gold – a 74% increase compared to 2017.
The trend continued in 2019: in the first three months of this year central banks around the world bought 145.5 tonnes of gold, 68% more than in the same period last year. This is the increased demand for accurate metal by central banks since 2013.
Russia leads the “gold rush”: in its attempt to reduce dependence on the US dollar, in the last 15 months the Central Bank of Russia bought 329.3 tonnes of gold, increasing the share of the precious metal to almost 19% and reducing that of the US currency in its international reserves.
Among other countries that bet on gold are China, Turkey, Ecuador, Kazakhstan, Qatar, Colombia, Serbia, the Philippines and several other countries. But why is it that in recent times gold has become so attractive to central banks?
Independence and security
Traditionally, the demand for gold is growing amid the instability of the global economy: while currencies, even those of the strongest economies, may depreciate, gold being a solid asset represents a kind of secure investment. Its price may be vulnerable, but it can not fall to zero contrary to conventional currencies.
According to the International Monetary Fund (IMF), for example, in 70% of countries the growth rate is expected to slow this year) and the expansion of the protectionist economic policy in the midst of the Sino-American trade war make investors, as well as central banks, to increase their purchases of gold to save themselves from potential collapses in global markets.
In addition, gold can be considered the safest asset because it can not be frozen or blacklisted (if it is stored in the central bank’s coffers), while any state, in fact, can block the use of its currency by other countries if it deems it necessary.
Another argument in favor of gold is the possibility of diversifying its reserves, which also makes the value of reserves less vulnerable to financial and political instability: if the price of an asset falls, other assets in the portfolio could offset this devaluation by keeping the total value of the reserves.
Means to defend against sanctions
Under Washington’s trade sanctions and trade restrictions policy, which has already been adopted against several countries, including Russia, Iran, Venezuela, China and EU countries, more and more countries are considering becoming less dependent on the US dollar. Gold, along with other currencies most commonly used in the world, such as the euro or the yuan, is an appropriate asset to launch the process of de-dollarization.
Russia and China have already disposed of a significant amount of their US Treasury bonds, replacing them with gold and other currencies. Indeed, through its policy of restrictions, the US is pushing the other countries to abandon the dollar and bet on other currencies and gold.
“The dollar is gradually and inevitably losing its share of the global market. This is not just about Russia but about the whole world,” Russian Minister of Economic Development Maksim Oreshkin said on June 6 at the International Economic Forum in Moscow. St. Petersburg (SPIEF).
At the same time, the current situation is expected to lead to higher real asset prices, primarily gold. Another factor that will contribute to the increase in the price of the precise metal is that its production will begin to fall in the next years, reaching in 2022 the level of the beginning of the last century.
Case of Venezuela
The current political crisis in Venezuela is a good example of how gold could help resist the economic pressure of other states: Venezuelan officials regularly withdraw gold from the country’s central bank to support the economy.
According to official sources, since the beginning of the year Caracas has sold 30 tons of precious metal. According to some estimates, Venezuela’s gold reserves are currently around 100 tonnes. And if the country did not have these reservations, Caracas might not be able to counter the pressure of Washington for such a long period.
It should be noted that this is the gold stored in the national treasury. For example, last year under pressure from Washington, the Bank of England refused a request from Venezuelan President Nicolas Maduro to repatriate gold from Venezuela in London, although gold does not belong to the Bank of England or the British government, but to Venezuela.
This very scandalous situation proves once again that, amidst political and economic divergences, gold could serve as a kind of protection against external interference, but it is better to accumulate its reserves in the national territory to avoid any asset freeze.
Everything indicates that in the near future monetary authorities around the world will continue to increase their purchases of gold. And who knows, maybe one day, after a long period of dollar hegemony, the world will return to the gold standard.