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The price of gold has risen sharply in recent years and the purchase of precious metals by central banks has played a major role in this, writes Jan Nieuwenhuijs In his recent article. Central banks of various countries have been buying more gold for some time to establish a new international payment system. Why are these countries working on a new payment system and why does gold play a major role in this?
In 2021, the starting signal was given to develop a new international payment system, called mBridge. This project was initiated by the Bank for International Settlements' Innovation Hub in Hong Kong and there are now five active participants in the initiative: Thailand, China, Hong Kong, Saudi Arabia and the United Arab Emirates. In addition, there are about 30 countries'observing member'. These countries are not yet participating, but will be able to participate in the future.
MBridge aims to establish an international payment system in which multiple central banks participate. The system runs on a Distributed Ledger Technology and is to be regarded as a platform on which transactions with Central Bank Digital Currencies can be carried out. Since multiple central banks are participating in the initiative, the platform can be used to facilitate fast international transactions. In addition, countries may reduce the use of the dollar in the long run.
Nieuwenhuijs writes in the article that the payment system is immune to Western sanctions, since the system is in Chinese hands. Of course, this also works the other way around: China's increasing power paves the way for Chinese interference in the participating countries. China remains a closed and opaque country, where policy is largely determined by President Xi Jinping. In addition, criticism of policy is not tolerated and economic data are often not available. If the government claims that there is no one in China lives in absolute poverty anymore, strangely enough, no critical question is asked about this from the media. It is highly questionable whether China will actually adopt a correct and neutral attitude if an international payment system is set up in which China manages the infrastructure. There is a danger that China will eventually use the new payment system to increase its influence in other countries.
It is interesting that the protagonists of mBridge are also the most prominent players in the gold market. Since 2022, mainly non-Western countries have been active in the gold market. On Holland Gold we also wrote several articles about the gold purchases of Central Banks. Gold has become especially popular after the war in Ukraine, when Russian assets in euros and dollars were frozen. The EU is even using the proceeds from frozen Russian assets to provide loans to Ukraine. In July, the first loan from one and a half billion euros Provides.
The countries participating in mBridge also dominate the market of gold. (Source: Money Metals)
As the euro and dollar are increasingly used as weapons, several countries have resorted to infull precious metals. The advantage of gold is that it does not contain any counterparty risk. Precious metals are not linked to any particular economy and therefore cannot be subject to sanctions as happens with Russian assets. In addition, gold has retained its value for thousands of years. It is striking that the full-fledged members of mBridge are also very dominant in the gold market. China, Saudi Arabia and Thailand have already increased their gold reserves in recent years, and Hong Kong is a province of China. The statistics of the United Arab Emirates are several years behind and are misleading due to smuggling to India.
The dollar is still the world's reserve currency, which means that it is widely held as a reserve and is widely used in international transactions. However, since 2022, a turnaround has been visible. Gold is on the rise compared to dollar-denominated assets, such as U.S. Treasuries. The new payment system could also make it easier for countries to use their own currencies for international trade. MBridge can make the capital markets in emerging markets much more attractive by creating a layer where central banks can settle transactions with each other. The platform can also make it easier to trade gold (and possibly other products) in local currencies. In this way, MBridge can ensure that countries use the dollar less.
Gold is becoming increasingly popular compared to U.S. Treasuries. (Source: Money Metals)
Russia has suffered a lot of damage from the sanctions since the war in Ukraine. Therefore, logically, dedollarization is most visible in Russia. In 2022, more than 60 percent of the requested currency consisted of the Russian foreign exchange market from dollars, but by 2023 this had already fallen to 40 percent. Trade with China is now almost entirely paid in Chinese renminbi. So, we see Russia replacing the dollars with other currencies. In addition, Russia is building up gold reserves.
Other countries may also follow this trend. For example, Saudi Arabia, the United Arab Emirates and Thailand signed agreements with China to promote the use of the renminbi. Saudi Arabia is now even considering allowing renminbi in the oil trade, while traditionally only dollars are allowed. In addition, gold is becoming increasingly popular with central banks. According to calculations by Jan Nieuwenhuijs, gold accounts for nineteen percent of total international reserves, while in 2014 this percentage was still ten percent. The dollar's share has fallen, from 62 percent in 2001, to 48 percent this year.
Nieuwenhuijs expects the trend of dedollarization to increase, as geopolitical tensions are also only increasing. Non-Western countries therefore have a motive to reduce their dependence on the dollar. An initiative like mBridge can be a good basis for these countries to promote trade with other currencies. On the other hand, these countries must also ensure that dependence does not shift from America to China. China will eventually want to take over America's position. And although there is much to criticize about the regime under the Americans, it is also highly questionable whether a dominant China is the solution. Also, America will continue to be an economic and geopolitical superpower in the coming years. It may be conceivable that other currencies will be used more, but the role of the dollar is certainly not over yet.
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