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Financial Bulletin

Gold's Rally: Central Banks' Revolt 'Accelerates' De-dollarization'

Release Time:2023-04-24

The oldest, traditional asset of all -- gold -- is becoming an important tool for central banks against the dollar.

Gold prices have risen more than 20 percent in the six months since last October. The main driver of this rally has come not from investors seeking to hedge their risks but from central banks looking for an alternative to the dollar.

Gold purchases by central banks rose 152% year on year to 1,136 tonnes in 2022, according to the World Gold Council. By February, the world's central banks had recorded 11 consecutive months of net increases in gold reserves. Countries have bought 125 tonnes of gold so far this year, making 2023 the strongest start to the year for gold since 2010.

Among the top 10 buyers of gold, Russia, India and China are also in talks with countries such as Brazil and South Africa to create a new way of trading away from the dollar.

The trend points to an accelerating "de-dollarisation" of the world, particularly in developing countries, which need gold as a backstop to help keep their currencies away from the dollar.

An annual survey of 83 central banks managing a total of $7 trillion in foreign exchange assets found that more than two-thirds of respondents believed they would increase their gold holdings by 2023.

The consequences of the "weaponization" of the dollar: Countries push to de-dollarize

Global trade has been based on the dollar since the end of the second world war, but why are more countries choosing to "blow up"?

This is because the US and its Allies are increasingly using financial sanctions as a weapon, argues Ruchir Sharma, head of Rockefeller Capital Management's international practice, in his FT column.

By some estimates, up to 30% of countries now face sanctions from the United States, the European Union and Japan, up from 10% three decades ago.

But until the conflict between Russia and Ukraine, the targets of sanctions imposed by the United States and its Allies were usually small countries, until Russia was slapped with sweeping sanctions that cut Russian banks off from the dollar-based global payments system.

Suddenly it dawned on everyone that any country could be targeted under this system.

The number of countries considering issuing their own digital currencies has reportedly tripled since 2020 to more than 110, representing 95% of global GDP. Many countries have begun testing the use of these digital currencies for bilateral trade.

Sharma said the "weaponization of the dollar" has severely undermined the trust that countries had built up in the past, while doubts about the ability of the United States to repay its debts are also undermining its status.

As Brazilian President Luiz Inacio Lula da Silva said during a visit to the New Bank's headquarters in Shanghai this month:

I wonder every night, why do all countries settle in dollars? Why can't the renminbi or some other currency be the international settlement currency?

Why can't the BRICS bank lend in its own currencies? I know you're all used to dollars, but we can do things differently in the 21st century.

In addition, Acorn Macro Consulting, a British economic research firm, notes that in 2022, for the first time in history, the share of GDP of the BRICS countries (Brazil, Russia, India, China, and South Africa) exceeded that of the G7 countries (Canada, France, Germany, Italy, Japan, the UK, and the US) on a purchase parity basis.

While the G7 membership remains the same, the BRICS countries are growing, with Argentina and Iran having submitted applications and other major regional economic powers such as Saudi Arabia, Turkey and Egypt expressing interest in joining.

As the prospect of continued global domination by the dollar fades, the G7 and BRICS are on opposite tracks: it may not be too long before the BRICS actually surpass the G7 in real GDP, not just purchasing power parity.

Risk warning and disclaimer clause

The market is risky and investment needs to be cautious. This article does not constitute personal investment advice and does not take into account the particular investment objectives, financial situation or needs of individual users. Users should consider whether any opinion, opinion or conclusion in this article fits their particular situation. Invest accordingly at your own risk.

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