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With a shift from the dollar to a multipolar world order based on different currencies, interest in gold as a strategic reserve will continue to increase. This is what Andrew Sheng of the Asia Global Institute writes in the latest newsletter of the World Gold Council.
Due to the growth of the Chinese economy and the internationalization of the yuan, the global monetary system is taking on a multipolar character. This means that central banks need to look at risk in a different way.
The market share of the Chinese yuan in international trade is currently still very small, but it is expected that this share will increase further in the coming years and that the demand for dollars will also decrease. This could have major consequences for the United States, because in recent decades it has always been able to finance its deficits by issuing debt securities.
In a multipolar world order, the willingness to finance U.S. deficits will getting smaller and smaller, which means that central banks need to hold more alternative reserves. According to Sheng, gold can play an important role in this, because the precious metal is highly liquid and has no counterparty risk. Especially emerging economies such as China, India and Russia would be wise to expand their gold reserves even further, because these countries have relatively little gold at their disposal compared to most Western countries.
China currently holds only 2.3% of its reserves in precious metals, compared to 5.8% for India and just over 17% for Russia. Those percentages are low compared to the more than 60% for the largest economies in Europe. The fact that most goods worldwide are still settled in dollars is an important reason for central banks to still hold a significant part of the reserves in these currencies.
In the long run, this may be a risky strategy, especially in the perspective of a looming trade war that creates more barriers to capital flows and investment. In that scenario, gold, as a completely neutral reserve, adds great value to the balance sheets of central banks.
This contribution was made from Geotrendlines
