Central banks buying gold at a 55-year high, away from the dollar?

International Business News – Central banks in countries such as China and Turkey are buying gold in large quantities. 2022 saw the highest net purchases in 55 years. Some analysts believe that due to the economic sanctions following the Russia-Ukraine conflict, Russia’s dollar holdings have been frozen and countries are actively turning to gold, which is also easy to trade under sanctions. There is also a trend away from the U.S. dollar in trade and financial transactions, such as China’s increased imports of yuan-denominated crude oil, and the waning influence of the U.S. dollar, the axis currency.

The World Gold Council (WGC), an international research organization, released its report on gold trading in 2022 on Jan. 31. Net purchases by central banks (the value of purchases minus sales) stood at 1,135 tons, the highest level since 1967 (1,404 tons).

The previous dollar-gold standard with a fixed ratio of gold to the dollar faltered in 1967 due to the U.S. fiscal deficit and the devaluation of the British pound, with “massive gold purchases by European central banks” (World Gold Council). 1971 saw the development of the “Nixon Shock” in which the U.S. stopped exchanging dollars for gold.

The year 2022 saw a historic change in purchases since then. Some analysts believe that the sanctions against Russia became an opportunity to buy. Yukichiro Kamei, a Japanese financial and precious metals analyst, said, “It gives the impression that the risk of holding assets in the ‘Western’ economic circle, such as the U.S. dollar, is high if confrontation with Europe and the United States arises.”

The World Gold Council aggregates the gold holdings reported to the International Monetary Fund (IMF) by central banks and others. For those portions that are not reported to the IMF but can be considered highly accurate purchases based on independent surveys, the overall world transactions are aggregated by not disclosing the names of the countries, even though they are not reported.

By country, the outstanding gold purchase is China. 62 tons were purchased in the 2-month period from November to December. The public figure is the first for China in 3 years. In the 1 year to November, China reduced its holdings of U.S. Treasuries by about 20%, and its gold purchases for the year are likely to be even more significant. Turkey (148 tons), India (33 tons), Qatar (35 tons) and Uzbekistan (34 tons) under inflation also bought gold in large quantities.

Russia, which stopped disclosing its foreign exchange reserves after the Russia-Ukraine conflict, and others are also considered to be big buyers of gold. Market analyst Yoshio Toyoshima said: “Russia is a gold-producing country, the possibility of reserving its own gold as foreign exchange reserves is high”.

Central banks have become active in buying gold since around 2010 after the Lehman crisis. With the assistance of Tetsu Yoshida of Rakuten Securities, the Nihon Keizai Shimbun analyzed the gold holdings at the end of 2012 and 2022, and the most obvious increase in holdings was in Russia, which increased by about 2.4 times to 2,298 tons in 10 years. China also increased by about 950 tons, second only to Russia in terms of increase. In terms of the ratio of gold to foreign exchange reserves, Russia has increased from about 10% to about 20% in 10 years.

According to the “Liberal Democracy Index” calculated by the V-Dem Institute, based at the University of Gothenburg in Sweden, countries that have increased their gold holdings are mostly classified as “non-democratic”. There were also purchases by countries that were actually targeted by sanctions, such as Hungary, which increased its gold holdings 30-fold to 94 tons in 10 years.

In addition to sanctions, concerns about the world economy, inflation and the U.S. economy are also the backdrop for buying gold as part of a diversification of foreign exchange reserves. The National Bank of Poland (central bank) said that “gold is not tied to any country’s economy and can withstand disruptions in the world financial markets.”

The central bank’s buying of gold is a symbol of moving away from the dollar. The dollar’s share of foreign exchange reserves was over 70% in 2000, but is now starting to fall below 60%.

According to the IMF, the dollar is still the dominant currency with a share in trade of more than 88% (200% overall on a combined buy and sell basis). However, China’s crude oil transactions with Russia and Iran have switched to RMB, and its share has reached 7%, jumping to the 5th place in the world.

According to Yuichi Ikemizu of the Japan Precious Metals Market Association, the central banks’ buying of gold is a sign of shaking up the strong dollar. If countries reduce their dependence on the dollar, the effect of financial sanctions imposed by Europe and the United States at the time of “something” will be weakened.