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The US dollar has become so weaponized that central banks are snapping up politically-neutral gold

Huileng Tan   

The US dollar has become so weaponized that central banks are snapping up politically-neutral gold
  • Gold prices are reaching record highs because of strong buying by central banks.
  • Central banks in countries aligned with China are diversifying their assets from the US dollar into gold.

Gold prices are on a tear recently thanks to strong buying by central banks — a signal that the precious metal is increasingly seen as a geopolitical hedge.

Last week, a top International Monetary Fund official pointed to gold's role in a potential fragmentation of the global economic and financial order.

"After years of shocks — including the COVID-19 pandemic and Russia's invasion of Ukraine — countries are reevaluating their trading partners based on economic and national security concerns," said Gita Gopinath, an IMF deputy managing director

In particular, some countries are rethinking their heavy reliance on the US dollar in their international transactions and foreign reserve holdings, she said.

Demand for gold has risen because it's seen as a "politically neutral safe asset, which can be stored at home and be insulated from sanctions or seizure," said Gopinath.

Central banks accounted for one-quarter of gold demand in 2022 and 2023, as the institutions bought over 1,000 tons of gold each year, according to the World Gold Council in a recent report.

The world's central banks continued buying gold, snapping up 290 tons of gold in the first quarter of this year — the strongest start to any year on record, according to the council.

Gold as a hedge against US dollar-based sanctions risk

Concerns about the US dollar's outsized influence and power in the world economy have been brewing for years. The West's unprecedented slate of sanctions and weaponization of the dollar against Russia over the invasion of Ukraine have heightened the push for de-dollarization.

To be sure, the greenback is so entrenched in the global economy that most experts don't expect it to lose its dominance and status as the world's reserve currency in the foreseeable future.

But countries around the world — particularly those aligned with China — are increasingly hedging their political risks by loading up on alternative assets, and in particular, gold.

The share of gold in the foreign reserves of the "China bloc" has been rising since 2015, said IMF's Gopinath. Other than Russia, she did not name any other country in the "China bloc."

In contrast, the share of gold in the foreign reserves of countries in the "US bloc" has been broadly stable.

This suggests that gold purchases by some central banks may have been driven by concerns about sanctions risk, Gopinath said.

In China's case, the share of gold in its foreign exchange reserves increased from under 2% in 2015 to 4.3% in 2023. Meanwhile, its proportion of holdings of US Treasury and Agency bonds fell from 44% to about 30%, according to IMF's Gopinath.

Central banks will keep buying, despite high prices

While China's central bank gold buying has been hogging the headlines, other central banks are also loading up on gold. The World Gold Council wrote in its recent report that other big gold buyers included Turkey and India.

JPMorgan analysts wrote in a March report that they expect central banks to continue with their pace of buying this year while being "less sensitive to prices." This means gold prices are likely to stay high this year.

To be sure, the ongoing gold rush is not just based on geopolitics.

Gold's current price surge is also helped by a strong dollar, which is spurring some emerging countries to hedge their currency risks. In China, people are also snapping up gold to hedge against domestic economic uncertainties.

The spot gold price is currently around $2,340 an ounce, down from its record-high above $2,400 an ounce in April.

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