Central banks around the world are turning to gold as an alternative to the US dollar, which they see as being undermined by America’s aggressive trade policy and geopolitical uncertainty.
Background
Gold is a chemical element and atomic number 79, making it one of the higher atomic number elements that occur naturally. In its purest form, it is a bright, slightly reddish yellow, dense, soft, malleable, and ductile metal. Chemically, gold is a transition metal and a group 11 element. It is one of the least reactive chemical elements and is solid under standard conditions.
A relatively rare element, gold is a precious metal that has been used for coinage, jewellery, and other arts throughout recorded history. In the past, a gold standard was often implemented as a monetary policy, but gold coins ceased to be minted as a circulating currency in the 1930s, and the world gold standard was abandoned for a fiat currency system after 1971.
A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. Three types can be distinguished: specie, bullion, and exchange. Most nations abandoned the gold standard as the basis of their monetary systems at some point in the 20th century, although many hold substantial gold reserves.
The United States is the single largest holder of gold reserves with 8,100 tons which constitutes 74% of its foreign reserves.
Analysis
Central banks around the world are turning to gold as an alternative to the US dollar, which they see as being undermined by America’s aggressive trade policy and geopolitical uncertainty. Demand for gold was up 42 per cent year on year in the first quarter of 2018 among central banks, the World Gold Council (WGC) statistics say. Russia and Turkey are the largest net buyers.
Central banks added a net total of 193.3 tons of bullion in the half of 2018, an 8 per cent increase from 178.6 tons bought in the same period last year. This marks the strongest six months for central bank gold buying since 2015, the WGC notes.
As of the first half of 2018 central banks increased their gold holdings to $1.36 trillion, around 10 per cent of global foreign exchange reserves, the WGC said. An analyst has told RT that the reason behind the move is a wish to diversify from the greenback.
The United States has long used the dollar to put pressure on competitors. This has always caused anger in the world community. And now the fight against the dollar has reached Europe. Russia has stepped up buying gold in its reserves in the face of new US sanctions and a possible disconnection from the dollar system. A similar strategy is now being observed in many countries in Europe and Asia. China, Turkey, Venezuela, Iran, Qatar and Indonesia, are aimed at the de-dollarization of economies and foreign trade. All these countries are significantly increasing their gold reserves, the expert says.
As the WGC notes in its report, gold buying is not only about hedging currency risks. “In an environment of heightened geopolitical tensions, gold is an attractive asset because it is not anyone else's liability and does not carry any counterparty risk,” the report says.
Gold is already a familiar asset class for central banks, but the changing nature of the gold market – with ever-growing consumption coming from developing economies – means that gold is increasingly aligned with emerging market economic patterns. Central banks may increasingly recognize that the rules of the game are changing.
Assessment
Our assessment is that central banks are hedging against the volatile global markets by investing into a more stable commodity. Gold is the best non-currency commodity to store foreign exchange because of its limited supply and global demand. We believe that the central banks are mitigating the shockwaves of the ongoing trade by shoring up as much gold as possible. We also feel that the US may release some of its gold reserves in the market to balance the sharp increase in gold prices in the near future.
FAQs
Central banks around the world are turning to gold as an alternative to the US dollar, which they see as being undermined by America's aggressive trade policy and geopolitical uncertainty.
What countries are dumping the U.S. dollar? ›
Countries like India, China, Brazil, Malaysia and Bolivia, among others, are seeking to set up trade channels using currencies other than the almighty dollar. With so much of the world economy reshaping itself in the post-pandemic landscape, is the reserve status of the U.S. dollar going to be the next domino to fall?
Why are countries leaving the U.S. dollar? ›
It's increasingly clear that, as non-western countries assert themselves in the world's economic arena, geopolitical divisions with the west will cause additional friction. As a result, the US dollar's role is almost certain to become more limited than it has been at any time since the end of the second world war.
What currency will replace the U.S. dollar? ›
Some say it will be the euro; others, perhaps the Japanese yen or China's renminbi. And some call for a new world reserve currency, possibly based on the IMF's Special Drawing Right or SDR, a reserve asset. None of these candidates, however, is without flaws.
Will the U.S. dollar be backed by gold? ›
In 1971, the U.S. fully severed the direct convertibility of dollars into gold. In other words, no country backs its currency by gold. In the U.S., currency is backed by the government and its ability to continually generate revenue.
Why did the US abandon the gold standard? ›
The gold standard was abandoned due to its propensity for volatility, as well as the constraints it imposed on governments: by retaining a fixed exchange rate, governments were hamstrung in engaging in expansionary policies to, for example, reduce unemployment during economic recessions.
Is the US dollar in danger? ›
Despite occasional challenges and concerns, the likelihood of the U.S. dollar collapsing is considered to be extremely low, given its strong global position and the underlying strength of the U.S. economy.
Who is ditching the dollar? ›
China has pursued de-dollarization — efforts to reduce global reliance on the U.S. dollar for trade and financial transactions — through partnerships with non-Western regional and multilateral groups, such as the Shanghai Cooperation Organization (SCO) and BRICS, by advocating for the use of local currencies in ...
What happens to my savings if the dollar collapses? ›
In the event of a dollar collapse, diversification becomes a critical strategy for safeguarding assets. Relying solely on fiat money, such as the United States dollar, Euro, or the Japanese yen, exposes investors to the risk of inflation and depreciation, eroding the purchasing power of their savings.
How to prepare for the collapse of the US dollar? ›
What To Own When The Dollar Collapses
- Having too much money in a single asset is always a risky proposition. A varied investment portfolio is crucial to weathering any financial storm. ...
- Commodities. ...
- Foreign Bonds. ...
- A Variety Of Currencies. ...
- Gold And Precious Metals. ...
- Real Estate. ...
- Items To Barter With. ...
- Cryptocurrencies.
International Debt and Financial Stability: As the reserve status of the dollar diminishes, countries holding significant amounts of US dollar-denominated debt may experience financial turbulence. Exchange rate fluctuations and potential defaults could undermine financial stability in both debtor and creditor nations.
Is China trying to replace the US dollar? ›
China's Strategy Moving Forward
In the past, Chinese authorities believed a global alternative to the dollar system was possible. However, today, China focuses almost exclusively on promoting the yuan through trade.
Is BRICS a threat to the US dollar? ›
There should be no doubt that the BRICS+ group aims to undermine the dominance of the US dollar, but the degree of commitment varies between Russia, Iran and China's ambition, and the less-committed countries such as India and the UAE, where the preference is for their own currencies to take a bigger share.
What is the new currency backed by gold? ›
HARARE, May 7 (Reuters) - Zimbabwe's treasury said on Tuesday the newly introduced gold-backed currency is the official unit of exchange for transactions and that it would soon introduce regulations to ensure businesses stick to the official rate.
Will gold be valuable if dollar collapses? ›
A US dollar collapse would also likely affect the gold market in the U.S. Rising inflation, a common result of a falling dollar could make gold more popular as an investment. This would likely cause gold prices to rise. The rising demand for gold could also increase the amount of gold mined in the U.S.
Could the US ever go back to the gold standard? ›
Is there enough gold to return to the gold standard? The fact that the US doesn't have enough gold in its reserves to pay back all its debt poses a huge roadblock to returning to the gold standard. The country would have to exponentially replenish its gold reserves in advance of any return to the gold standard.
Who stopped backing the U.S. dollar with gold? ›
The Nixon shock was the effect of a series of economic measures, including wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the United States dollar to gold, taken by United States President Richard Nixon in August 1971 in response to ...
Are any countries still on the gold standard? ›
What countries are on the gold standard today? Currently, the gold standard isn't used as the monetary system for any nation. The last country to abandon it was Switzerland, which severed ties between its currency and gold in 1999. Not coincidentally, Switzerland has the seventh largest gold reserve of all countries.
What is US money backed by? ›
Prior to 1971, the US dollar was backed by gold. Today, the dollar is backed by 2 things: the government's ability to generate revenues (via debt or taxes), and its authority to compel economic participants to transact in dollars.
What is Brics' currency? ›
The BRICS nations, originally comprised of Brazil, Russia, India, China and South Africa, are looking to establish a new reserve currency backed by a basket of their respective currencies.
So now the BRICS (Brazil, Russia, India, China, and South Africa), led by Russia, are discussing how to escape dollar dominance. Russian President, Vladimir Putin forecast the “beginning of the end” for the dollar in June 2023.
Is China dumping the dollar? ›
China ramps up de-dollarization efforts by dumping a record amount of US bonds. China sold a record $53.3 billion worth of Treasurys and agency bonds in the first-quarter, Bloomberg reported. It previously unloaded US debt to prop up its yuan, which has again grown weak against a rallying dollar.
What countries have had a currency collapse? ›
Examples of currency crises that led to recessionary periods include the crisis in the Weimar Republic in Germany after World War I, the Mexican peso crisis of 1994, the Asian Crisis of 1997, the 1998 financial crisis in Russia, the Argentine crisis in the late 1990s, the economic crisis in Venezuela in 2016, and ...
What countries have a shortage of dollars? ›
“The most vulnerable countries are those with overvalued currencies, including Nigeria, Kenya and Angola, and those with low foreign-exchange reserves, like Malawi.” Eurobond issuers who were forced to devalue this year include Egypt, Nigeria and Angola.
