How Central Bank Gold Buying Is Undermining The Dollar
The comments below are an edited and abridged synopsis of an article by Richard Mills
There are many reasons why central banks are buying gold, and what Mills has found out is eyebrow raising. It may be the best reason you’ve ever read for wanting to buy gold.
Central banks are major gold buyers in 2019. They have netted 51 tonnes, the most since October 2018, when they increased gold reserves by 105 tonnes. This is the highest level of gold buying by central banks since the first two months of 2008, during the financial crisis.
Central banks also bought gold in 2018, buying 651.5 tonnes versus 375 tonnes in 2017. That’s the largest net purchase of gold since 1967.
Anti-US sentiment could be the cause of all this central-bank gold buying. There is a geopolitical element to it, as central bank buyers are generally from countries that stand in direct economic or political opposition to the US and are keen to move away from the US dollar as a foreign reserve currency. Case in point: The top two purchasers were Russia and Turkey.
Russia wants to reduce its dependence on the dollar in an effort to skirt US sanctions. Russia’s central bank bought a record 274.3 tonnes in 2018, while selling US Treasuries, bringing its share of the US dollar as a foreign reserve down from 43.7% to 20%. Between March and May of last year, Russia sold off 84% of its US debt holdings, leaving just $14.9 billion in its US reserve account.
Turkey is warding off a sluggish economy. Gold is one way to support the lira versus purchasing US Treasuries, which is difficult to do with the relative strength of the US dollar. A couple of years ago Turkey’s President Erdogan called on citizens to buy gold, and they have.
So central banks’ recent gold accumulation has little to do with safe havens and a lot to do with chipping away at the US dollar’s role as the reserve currency.
Up for discussion: The rise of the petrodollar; exorbitant privilege; the US dollar losing its privilege; Saudi Arabia’s nuclear option; and a perfect storm for gold.