Central banks are reducing dollar reserves

In recent years, power plants have not only added gold to their reserves, they have also been reducing their reserves in dollars. Russia had $100 billion in U.S. Treasuries in December last year, but that had halved to about $48 billion in April. On balance, China is also not buying more US Treasuries, while other countries are also holding relatively fewer and fewer reserves in dollars.

This trend is also reflected in the IMF's figures, which show that the dollar's market share in the total reserves of central banks has fallen from 28.1% in 2008 to 25.4% now, while the share of gold has remained stable at around 11% all this time, according to figures from the World Gold Council.

The subtle and gradual shift of dollar reserves to other currencies and gold can be attributed to a small number of countries that are very fanatical about buying gold. For example, Russia, Kazakhstan and Turkey together have accounted for half of all gold purchases by central banks over the past five years. And that's not even counting the large purchases by the central banks of China and India in recent years.

Central banks hold fewer dollar reserves (Source: Bloomberg)

Central Banks Expand Gold Reserves  (Source: Bloomberg)

Central bank diversification

If we look at the total foreign exchange reserves of central banks and the portion that consists of US Treasuries, we see a very gradual shift away from the dollar. Whereas in 2011 about 23% of the US national debt was held by central banks, now it is only 16%. So there is less and less willingness in the rest of the world to finance the American deficits.

Instead, several emerging economies are choosing to build up more gold reserves. In the first three months of this year, central banks bought a total of 116.5 tonnes of gold, the largest amount for the first quarter since 2014 and 42% more than in the first three months of last year. Since 2009, central banks have collectively added precious metals to their reserves on a quarterly basis.

The decision of several central banks to buy gold is mainly strategic, because the latest quarterly report of the World Gold Council shows that consumers and private investors bought 7% less gold bars, coins and jewellery in the first three months of this year than a year earlier. Consumers appear to be more sensitive to the development of the gold price, while central banks take a more long-term view.

Central banks own fewer U.S. Treasuries  (Source: Bloomberg)