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The idea that the US dollar cannot lose its status as the world's reserve currency is particularly prevalent in the West, as countries elsewhere in the world are increasingly preparing for an era after the dollar. Not only are central banks buying gold at record speed, we also see that more and more countries are making agreements to use their own currencies for mutual trade. The Financial Times notes that the US dollar has recently weakened against other currencies and that this development is now accompanied by an increase in the price of gold. What does this mean for the price of gold and the future of the financial and monetary system?
Over the past six months, the price of gold in dollar terms has risen by 20%. And that price increase is not only driven by private individuals who Buy gold to hedge against high inflation. Central banks are also increasingly active in the gold market. Last year they bought a Record quantity of 1,136 tonnes of gold and since the beginning of this year, the pace of gold purchases has increased even further. The World Gold Council has mapped all central bank purchases since 1950 and concludes that central banks have never before bought gold at this rate. Currently, they are even buying up a third of the supply.
Central banks thus have a significant impact on the development of the Gold price. Whereas in the past fifteen years there has been a strong negative correlation between the gold price and real interest rates in the United States, now that correlation seems to have been broken. Whereas the price of the precious metal previously reacted negatively to higher interest rates, the market now seems much less sensitive to this. And that's because central banks have other motives for buying gold than fear of inflation.
If we look at the list of central banks that currently buy the most gold, it is striking that almost all of them (9 out of 10) are non-Western. Often they are also countries that have a difficult relationship with the United States or that have to deal with economic sanctions. That makes having gold as a monetary reserve even more important, as the precious metal is not subject to the political risk of economic sanctions. A gold reserve cannot be blocked and cannot be confiscated, provided that a central bank uses its gold reserves. domestically.
For many non-Western countries, buying gold is a way to resist the dollar system and the dollar's dominance in international trade. It is also a clear vote of no confidence in the dollar. Until recently, both gold and the dollar were considered safe havens, but due to the freezing of Russia's currency reserves and the domestic problems in the US (banking crisis and debt ceiling), the dollar has much of its luster lost. During the banking crisis, the value of the dollar fell, while the price of gold rose. Never before have these two safe havens moved so strongly in opposite directions.
Central banks are therefore buying gold to hedge against the risk of the dollar. At the same time, we also see another trend, namely that more countries outside the Western sphere of influence no longer want to use dollars for international trade. Think of Russia, China and India, which are settling more and more transactions in their own currencies. Brazil, too, under the leadership of the new president Lula, has taken a different course. Just recently, the president of South America's largest economy Highly critical out on the dollar. He advocated for a new currency for BRICS countries:
"Every night I ask myself why all countries have to pay for their trade with US dollars. Why can't we trade with our own currency? Why don't we innovate? Who decided that the dollar should become the currency after the disappearance of gold backing? Why not the yen, the real or the peso? Because our currencies were weak. They had no value in other countries.
We need to have a currency that transforms countries into a more stable situation, because today countries have to chase the dollar in order to be able to import. Why can't the BRICS have a currency that facilitates trade between, say, Brazil and China? And trade between Brazil and other BRICS countries."
Of course, many eyes are on the Chinese yuan, a currency that until recently hardly played a significant role on the international stage. In the past, the Chinese used almost exclusively US dollars and, to a lesser extent, euros for international trade. But in March this year, China used it for the first time More yuan than dollars for international payments. The yuan's share rose to 48%, while the dollar's fell to 47%. By comparison, in 2010, the yuan's share of China's international trade was virtually zero, and the dollar dominated with an 83% share. So a lot has changed since then, with a clear acceleration in recent years.
Share of yuan and dollar in Chinese trade (Source: Bloomberg)
"The internationalization of the yuan is accelerating, as other countries seek an alternative payment currency to diversify risks and because the Federal Reserve's credibility is no longer as good as it used to be," Chris Leung, an economist at DBS Bank, told Bloomberg. Because more and more Chinese companies can now invoice in yuan for international transactions with a large number of countries, they run less currency risk. It also strengthens the value of the yuan if it is accepted in more countries. Just recently, Russian President Vladimir Putin expressed his support the use of the Chinese yuan for trade between Asian countries. Also Russia Accepts Chinese yuan as payment for oil and gas, for example.
The transition from a dollar-based monetary system as the world's reserve currency to a multi-currency system has major implications. Holding dollar reserves will become less obvious for many countries and the demand for dollars will also gradually decrease. Other currencies will gain more market share in international trade, whether it is a BRICS currency or a mix of different currencies.
In which currencies will countries hold their monetary reserves? It's hard to say right now. Gold is expected to benefit from this scenario and that will be accompanied by more gold purchases and a higher gold price.
