Central banks are becoming increasingly important players in the international gold market. According to the latest report by the World Gold Council, in the first half of 2018, as much as 10% of global demand for gold was generated by this sector. Can we already talk about a trend away from the dollar in favor of gold?
The Market Update: Central bank buying activity publication clearly shows that central banks have recently been focusing more and more attention on gold. In the first half of 2018, demand in this sector amounted to 193.3 tons, which is 8% more than in the same period last year. The last time such a level was reached was three years ago.
GOLD OVER THE DOLLAR
According to experts from the World Gold Council, the phenomenon of moving away from the dollar mainly affects developing countries, which are more concerned than developed economies about their financial security becoming dependent on the US. For them, accumulating gold is a way to diversify their portfolios by reducing the share of the US currency in their reserves. At the top of the list of the largest buyers are Russia (+383.3 t), Turkey (125.8 t), and Kazakhstan (68.4 t), which together purchased as much as 86% of the gold allocated to this sector.
However, these are not the only countries worth mentioning in this context. What came as a surprise was the exceptionally large number of countries returning to the group of buyers. For example, Egypt purchased gold for the first time since 1978 (+1.7 t). After a long absence from the market, India, Indonesia, Thailand, and the Philippines also reappeared. Bloomberg reported unusually large purchases made by Mongolia (+12.2 t).
NO WORTHY SUCCESSOR
The World Gold Council report highlights issues related not only to the dollar, but also to other currencies. According to the authors of the publication, it is not only the US currency that faces numerous problems: the euro's position is undermined by political and economic turmoil in several member states, the pound continues to be affected by uncertainty surrounding Brexit, and the Chinese yuan's trading range is too limited. Therefore, excessive dependence on foreign exchange reserves entails dangerous exposure to all kinds of crises, both international and domestic.
With confidence in the dollar declining and no worthy successor in sight, we can expect the international monetary system to transform from unipolar to multipolar in the coming years. Thus, the need for diversification will remain one of the most important drivers of demand for gold among central banks, which will become increasingly important strategically.
Based on: "Market Update. Central bank buying activity," www.gold.org and "Central bank demand for gold reaches 3-year high," www.mining.com
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