Why central banks are now buying the most gold in 80 years

Gold for dollars. This is exactly what the central banks of many countries around the world are doing right now. These countries were looking for ways to reduce their dependence on the United States. They think the safest way is to leave the dollar and increase the gold reserves.

Accounting of how much gold a country is hoarding started in 1950. The World Gold Council says central banks held the most gold hoards last year, as seen since then. The Gold Council represents the gold industry.


According to the information obtained this year, this trend is still going on.

The dollar has been the dominant currency in global trade since World War II. At the same time it is the main currency of foreign exchange reserves. But Russia's invasion of Ukraine has shaken the world order. As a result, the measures taken by the central banks of various countries around the world seem to be against the dollar.


Analysts, however, don't think there will be any drastic changes. They say the dollar will continue to dominate for many more years.


But everyone is watching what is happening. The central banks of major economies, such as China, India or Brazil, are buying gold. They are adding gold reserves to their reserves at the fastest rate since World War II.


Some analysts say the trend began even before the Russia-Ukraine war. But many believe that the ease with which the US has imposed sanctions against Russia has encouraged many countries to move away from the dollar.


Seizure of Russian reserves


According to them, the world economy is moving towards a multipolar system. An example of this is that the rate of foreign exchange reserves held in dollars has fallen from 70 percent to 58 percent in two decades. In this case, Russia is mentioned. This country is among the most embargoed. Now they are trading out of dollars and buying more gold.


The response of these countries is logical. The United States has seized $300 billion in Russian reserves. Because, this reserve was kept in dollars. Omar Rashedi, a part-time teacher of economics at EZ Business School, said that many countries reduced their dollar holdings due to the US actions after the Russia-Ukraine war, fearing possible future sanctions. They prefer gold and yuan.


Private companies that do business with Russia fear the potential for US sanctions.


Since the beginning of this year, the price of gold has increased a lot in the world market. In dollar terms, its price has increased by more than 10 percent. Kirsten Menke, head of research at investment firm Julius Baer, believes that many people are thinking about a multi-polar world for these reasons. In a research report written by him, he said, 'We expect, in a multi-polar world, central banks will continue to buy gold this year as well. But it may not break the record like the previous year.


He said, he is not thinking much about the talks about de-dollarization or de-dollarization of the global financial system. However, he thinks that the current trend of gold hoarding by central banks is basically a kind of 'policy statement' against the US dollar.


Central banks like gold because the metal holds its value even in turbulent times. This is not the case with currencies or bonds. And the price of gold is not dependent on any organization or government. As a result, central banks can easily invest in US Treasury bonds and outside the dollar.


Lawrence H. White, professor of economics at George Mason University, said central banks can build up gold reserves for a number of reasons. But perhaps the main reason is that they want to invest their foreign exchange reserves in various ways.


He said, "For example, China is buying gold on the one hand, and on the other hand, they are selling a part of their US Treasury bonds." Investing in gold can be a way to free yourself from the risk of the dollar falling.


Professor Lawrence H. White believes that the dollar will dominate international transactions and neither the euro nor the yuan can take its place.


Interest rate diversification


Many countries are also moving away from the dollar as interest rates rise. Omar Rashedi of EZ Business School said that Treasury bills have lost value due to the US central bank's Federal Reserve raising interest rates, so many countries' central banks feel they need to diversify their investments.


That is why many countries are investing in assets other than the dollar, he explained.


But politicians have also spoken out against the dominance of the dollar. Brazilian President Luiz Inacio Lula da Silva recently called for a move away from the dollar during a visit to China. He asked, 'Why can't we trade in our own currency?'


González Toca, an analyst at Spanish research firm EsGlobal, said the dominance of the dollar is weakening and will continue to do so. The euro and yuan are rising. The importance of these two currencies in future reserves and trade transactions will increase.


Despite former President Donald Trump's talk of starting a 'trade war' against China, Washington's relationship with Beijing is not as tense as it used to be. Professor Rashedi believes the main challenge to the dollar will come from the yuan, as Beijing's loans under its Road and Belt program are denominated in yuan, not dollars.


But he also thinks that unless China creates a more protective environment for investors, and if the United States can ensure a free financial market and stabilize inflation, its dominance will continue for the next decade or more.


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