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We’ve reported extensively on the central bank gold-buying spree that has been going on for nearly two years. Russia and China have led the way, along with several other countries including Turkey, Kazakstan, India and Poland.
Central banks are buying gold to diversify reserves and minimize exposure to the dollar. This has been the mainstream narrative and it’s true. But China and Russia have a bigger geopolitical objective. They want to undermine dollar hegemony and reduce the United States’ ability to weaponize the dollar as a foreign policy tool.
By-and-large, the mainstream has ignored this narrative.
But some people in the mainstream appear to be catching on. An article recently published by MarketWatch by Brett Arends warned America to “watch out” because Russia and China are stockpiling gold and that “this could be the start of those countries’ attack on the dollar.”
Interestingly, Arends started the column asserting he “is not a gold bug,” and rolling out some of the usual mainstream tropes against the yellow metals. But he goes on to nail the motive behind Russia and China’s move to hoard gold, citing hedge fund manager Crispin Odey.
Some of America’s biggest geopolitical rivals were stockpiling gold. Especially China and Russia … And there’s an obvious reason for China to buy gold. It wants to break up the global hegemony of the U.S. dollar — the hegemony that former French President Charles de Gaulle called America’s ‘exorbitant privilege.’ It wants to make its own currency, the renminbi, a world player. And Odey argues that buying gold bullion is a natural move. Gold reserves should add to world confidence in the Chinese currency.”
And of course, the Russians have also stockpiled large amounts of gold. There has been talk in Russia of creating a gold-backed cryptocurrency along with the creation of an alternative to the dollar-based SWIFT payment system. These moves could also set the stage to topple the dollar as the world’s reserve currency.
Simply put, Russia and China are tired of the U.S. using the dollar as a foreign policy billy club and they are looking for ways to push back.
As Arends put it, by Making America Great Again, we could be making gold great again.
We are at a very rare inflection point in history: The passage of economic hegemony. China’s economy has already overtaken America’s by one key measure, just as America’s once overtook Britain’s. These periods of transition, throughout history, have been times of instability.”
Of course, this could be good for gold, and not only due to the demand created by central bank-buying. Arends quotes Odey who said, “You want to do what the central banks are doing.”
Arends doesn’t make any predictions about how high gold could go in the future. But he concedes it could rise significantly.
In theory, some gold bugs argue, a breakdown in the dollar’s hegemony could send the yellow metal spiraling upward by several hundred percent. We shall see.”
De-Dollarisation: Central Banks Led by Russia, China, Poland Buy Record-Breaking $15.7bn in Gold
Amid the uncertainty, prompted by the simmering trade tensions between China and the US, Brexit chaos and the US-Iran standoff, public financial institutions, as well as investors all over the world, are opting for the safe haven that the precious metal provides.
Central banks bought 374 tonnes of gold in the first half of this year, which is the largest-ever acquisition by public institutions in the first 6 months of a calendar year, The Financial Times reports, citing the World Gold Council. They bought bullions worth a record $15.7 billion, accounting for one-sixth of total gold demand since the beginning of 2019.
The leaders of the new gold rush are the central banks of Poland, China and Russia, diversifying their reserves at the expense of the dollar.
The Russian Central Bank has stocked up 96.4 tonnes of gold since January, confirming last week that the country’s total gold reserves had reached $100.3 billion by July 1. At the same time, China bought 74 tonnes of the precious metal in the six-month period through May.
These and other countries’ central banks have kept up with last year’s trend. In 2018, they acquired more precious metal than any year since 1971 when the gold standard, meaning the peg of the national currency to gold, ended.
Investors are also piling up gold holdings and opting for gold-backed exchange-traded funds (ETF). They are being driven by the softened stance of central banks, including a European Central Bank decision to cease limiting sales of the precious metal, amid geopolitical uncertainty and rising prices. While year-on-year demand rose by 8 percent and reached 1,123 tonnes, ETF gold holdings hit a six-year record of 2,548 tonnes in the second quarter. Overall, demand peaked to a three-year high in the first six months of this year. Gold prices, however, are continuing their confident climb, growing nearly 1.6 percent per year, and by a whopping 11 percent over the past two months, Market Watch reported recently.
The gold shopping spree has been accompanied by several states promoting a shift from the dollar to national currencies in bilateral trade. The trend of abandoning the dollar has notably been seen in a recent report on the economies of the BRICS countries, which have reduced the use of the greenback in mutual trade by 20%.
Last month, Russia and China signed an agreement on increasing trade in national currencies to reduce dependence on the dollar, with total trade using this mechanism expected to rise to as much as 50 percent in the coming years. Russian President Vladimir Putin earlier accused the US of using the dollar as a tool of pressure against other countries, and suggested that the global role of this currency should be reconsidered.
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