'Gold in vogue at central banks and overtakes euro'

Central banks now hold more gold than euros as reserves. That writes Jan Nieuwenhuijs in his new blog on Gainesvillecoins.com. According to Nieuwenhuijs, the dollar is the next target in the battle for the position as the preferred reserve of central banks. This leads Jan Nieuwenhuijs to a relatively different conclusion than ING, which wrote a report in April on the position of gold and various currencies. What are the different perspectives on the position of gold, the dollar and other currencies?

What reserves do central banks currently hold?

In his blog, Nieuwenhuijs points out that gold is often overlooked when looking at the mutual relationships of reserves. From that comparison, the dollar's hegemony seems virtually untouched. Although the share of dollars against other currencies is declining slightly, more than 60 percent of foreign exchange reserves currently consist of dollars. The dominance of the dollar is easy to explain. America has reigned supreme geopolitically for decades, and the dollar is used for the vast majority of international transactions.

Moreover, it was stated that Mathijs Bouman In the podcast with Holland Gold, most of the big companies still come from America and jump to the next trend very easily. That's according to companies such as Apple, Facebook, Tesla, and OpenAI. Therefore, it is quite possible that the dollar will be the dominant currency for a long time to come. It is true that currencies such as the Chinese renminbi, Indian rupee and Russian ruble are on the rise, but before the dollar can really be dethroned, a lot of water flows through the Rhine. This can also be seen in the graph below. The dollar remains dominant and emerging currencies such as the renminbi are growing only slowly.

The dollar is no longer as popular as it used to be, but it still takes the cake. (Source: Gainesvillecoins.com)

But the picture changes when gold is also taken into account. The following graph shows that gold is indeed increasing sharply in shares. This means that central banks hold more gold instead of currency reserves. After 1970, many central banks sold gold, causing the dollar's share to rise sharply. The Netherlands also sold under former president of De Nederlandsche Bank (DNB) Nout Wellink part of the gold supply. At the moment, DNB is holding on to a gold stock of four percent of GDP. Gold still functions as insurance, according to DNB. In addition, there are interest-bearing assets, such as bonds, on DNB's balance sheet. Other central banks, on the other hand, are buying more gold. For example, different countries are working with precious metals in their own way.

When looking at gold, the picture changes. (Source: Gainesvillecoins.com)

Is there a visible turnaround?

According to Nieuwenhuijs' chart, gold seems to be hurting the dollar in particular. The currencies of America and Europe were used as a weapon after the invasion of Ukraine when Russian assets were frozen. The currencies were not neutral and as a result, distrust grew. Many central banks of emerging economies in particular started looking for alternatives, often in the form of precious metals. In recent months, we have written more often on Holland Gold about the Purchase of gold by central banks. For example, the Chinese central bank adds for a year and a half gold to the reserves every month. Also Poland and Singapore are very active in the gold market and are building up larger gold reserves.

Emerging economies are also increasingly trading in other currencies. Here's how to buy Reliance Industries, one of India's largest companies, currently still has plenty of Russian oil and those transactions are paid in Russian rubles. Previously, dollars were used in the vast majority of international transactions, but the conflict in Ukraine may change that. In the Russian foreign exchange market, there is only one less than 40 percent of traded currencies from dollars. On the other hand, the share of the renminbi has increased from 13 to 42 percent in one year. It is therefore possible that central banks will also hold more alternative currencies as reserves in the future. Of course, it should be noted that Russia was forced by the situation to quickly switch to other currencies. In countries that are not sanctioned, this pressure is less great. If there is also a change in those countries, the process will probably take longer than in Russia.

Contrary opinion from ING

ING wrote in April also a report about the position of different currencies and gold. It is remarkable that ING and Nieuwenhuijs come to different conclusions. While Nieuwenhuijs mainly points to the decline of the dollar, the euro is the big loser, according to ING. The European currency lost market share as a reserve currency, especially after the war in Ukraine, and that helped traditional reserve currencies such as the dollar and the yen. If one corrects for exchange rate differences, the share of the dollar actually grew, according to ING. Before the war, the share of the dollar as a reserve decreased, the bank writes, but in 2023 the share increased again for the first time since 2015. And although several Asian currencies are on the rise, the dollar is lonely at the top. The dollar also remains dominant in the private sector and in the debt market, according to ING.

ING also concludes that the share of gold as a reserve has not increased. Although gold's share in total international reserves increased from 14.4 to 15.9 percent in 2023, this entire increase was due to the increase in the price of gold. On the other hand, according to ING, there was no significant net increase in gold added to the reserves. The bank also writes that there is no indication of a shift away from currencies and a recourse to gold. Jan Nieuwenhuijs writes in his column that the share of gold is growing at the expense of fiat money.

According to ING, the share of the dollar has not decreased since the war in Ukraine (Source: ING)

The differences between ING's report and Jan Nieuwenhuijs' article are remarkable. The two different perspectives are also largely due to the fact that ING adjusts for exchange rate differences by assuming that exchange rates will remain the same. That difference makes the matter even more complex, but it remains interesting that Jan Nieuwenhuis and ING draw two completely different conclusions about the role of the dollar, the euro and gold. The coming period will show whether the dollar will continue to lose ground, or whether the dollar will retain its dominant position.

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On behalf of Holland Gold, Paul Buitink interviews various economists and experts in the macroeconomic field. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here  to subscribe.