gold in exchange for dollars. That is what the central banks of many countries are doing in the search for less dependence on the United States.
The World Gold Council, which represents the precious metal industry, reported that last year central banks added to their reserves the most gold since 1950when the records began.
And this year’s data suggests that this trend is still alive.
The dollar has dominated world trade and served as the global reserve currency since the end of World War II, but Russia’s invasion of Ukraine has shaken the global order and financial authorities are leading a change in what appears to be a departure regard US dollar.
Analysts do not believe that there will be a radical transformation. The dollar has years of hegemony left, they say.
However, the movements have not gone unnoticed.
To name a few, the central banks of large economies such as China, India or BrazilThey, among others, are buying gold to replace the dollars in their reserves at the fastest rate since the war.
Some analysts place the start of this trend even before the invasion of Ukraine, but most point to it as one of the triggers for the ease with which the United States imposed sanctions on Russia when the conflict started.
“Western nations froze some of the remaining assets due to the 2022 invasion of Ukraine, which incentivized central banks around the world to further increase holdings of fungible gold”, explain Bank of America global commodity analysts.
frozen reserves
For them, the global economy seems to be moving towards a multipolar world and they cite as data the US currency drop in official foreign exchange reserves from around 70% two decades ago to 58% today.
“Russia, now the most sanctioned country in the world, is a good example, since it is among the largest de-dollarizers and buyers of gold in recent years,” they add.
This reaction is rational.
The United States was able to freeze Russia’s US$300 billion reserves because they were in dollars.
“After the US sanctions after the Ukraine war, countries have tried to reduce its exposure to potential sanctions in the future. This prompted a currency buildup in both gold and Chinese renminbi,” says Omar Rachedi, Adjunct Professor in the Department of Economics, Finance and Accounting at ESADE.
As has been seen, private companies that trade with Russia are also potentially vulnerableyes to US sanctions.
Since the beginning of the year, gold has shown stellar performance. So far this year, the precious metal is up more than 10% in dollar terms.
This is why the increasingly multipolar world is also an idea in the head of Carsten Menke, head of research at the investment firm Julius Baer.
political statement
“We hope that central bank purchases remain robust in an increasingly multi-polar world, but we do not expect last year’s record run to continue,” Menke wrote in a market report.
“We do not share the point of view of de-dollarization, although we consider that the purchase of gold by central banks is mainly a policy statement against the US dollar“, said.
Central banks like gold because it is expected to hold its value in turbulent times and, unlike currencies and bonds, does not depend on any issuer or government.
Gold also allows central banks to diversify away from assets like US Treasuries and the dollar.
“The reasons why central banks are hoarding gold vary, but probably the main one is that need to diversify their reserve assets“, Professor Lawrence H. White, from the Department of Economics at George Mason University, tells BBC Mundo.
“China, for example, has been buying gold and, at the same time, selling part of its large portfolio of US Treasury bonds. Holding gold instead of dollar assets is also a way to reduce exposure to the risk of dollar depreciation,” he states.
But “the dollar remains the dominant currency for international payments, and neither the euro nor the yuan will likely take its place,” White believes.
Diversification against interest rates
And it is that the rise in interest rates has also influenced the distance from the dollar in many economies
“The diversification needs of central banks are further exacerbated by the fact that their holdings of heUS Treasury bills have lost value due to the increases in interest rates carried out by the Federal Reserve of that country”, says Rachedi.
Thus, the shift to assets other than US currency – and especially US Treasury bills – has been a factor in It has also boosted diversificationexplains the ESADE professor.
For any economy of Latin America whose debt is in dollarsthe rise in rates has also been a setback.
The dominance of the dollar also spoke recently President of Brazil, L.uis Inacio Lula da silva.
In a speech delivered during a recent state trip to China, the president urged the BRICS countries – Brazil, Russia, India, China and South Africa – to develop a new currency and move away from the dollar.
“Why can’t we trade our own currencies?” he asked, quoted by Financial Times. “Who was the one who decided that the dollar was the currency after the disappearance of the gold standard?”
Speaking at the Shanghai New Development Bank, Lula called on the BRICS nations to establish a common currency with which they can transact.
A proposal that comes a few months after the announcement by Brazil and Argentina to articulate a common currency called the sol.
“It’s an old ambition. No one wants to be dependent on a currency they cannot control., but the reality is that no one can live without it. The broad hegemony of the dollar will be assured as long as there is no rival of the same magnitude”, explains Gonzalo Toca, an analyst at the think tank Spanish Global.
overwhelming hegemony
“We are talking about the currency of the world’s leading economy and the currency of the main driver of globalization and the international monetary system as we know it. For this very reason, the institutional architecture favors him, ”he recalls.
“That said, the overwhelming hegemony that the dollar has enjoyed has obviously started to weaken with the rise of the euro and yuan. And it will continue to weaken, in the coming years, while they gain weight as reserve currencies and payments”, says Toca.
And remember that relations between Washington and Beijing, on the other hand, not being good, are now less tense than during the “trade war” that the former american president Donald Trump decreed.
For Professor Rachedi, the main challenge for the global dominance of the US dollar may come from the Chinese renminbi, since China has begun to close oil contracts with Gulf countries at prices in renminbi and not in dollars.
In addition, the massive effort of the Belt and Road Initiative comes with the disbursement of contracts between China and countries in Asia, Africa and South Americawhose price is in renminbi and not in dollars.
“However, as long as China does not provide a well-protected environment for investors and make it possible for the government to directly control financial markets and possibly seize any financial accounts, the Chinese challenge to US dominance would not be as important.”
“As long as the United States manages to maintain free financial markets with a stable rate of inflation, its dominance is here to stay. over the next decade or so“, he predicts.
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