Central banks around the world have been eager for gold. They have become one of the foremost purchasers of the yellow metal. According to the Northern Miner, central banks bought 51 tons of gold in 2019. In 2018, central banks increased their gold reserved by 651.5 tonnes versus 375 tonnes in 2017. That’s the largest net purchase of gold since 1967.
Countries have held #gold as a reserve asset throughout history…
Here are the top ten holders:
*Updated May 2019…
— Gold Telegraph (@GoldTelegraph_) May 16, 2019
While central banks have traditionally held gold in reserves for economic reasons, the Northern Miner hints that the reason for these recent purchases is more geopolitical than economic. Many of the countries hoarding gold are at politic odds with the U.S. and are eager to undermine the U.S. dollar as the dominant reserve currency.
The U.S. has imposed numerous economic sanctions against Russia in an effort to change Russian’s behavior. In retaliation, the Russian Central Bank purchased 274.3 tons of gold in 2018 while at the same time dumping 84 percent of its U.S. Treasury debts.
Turkey, which is trying to climb out of an economic slump, has been buying gold to revive its sagging economy. It has sold off around 38 percent of its U.S. debt and pushing for the purchase of more gold.
Along with China and Iran, Russia and Turkey are attempting to drive down the value of the U.S. dollar. The current popularity of gold has less to do with it being a hedge against economic downturns than with it being a weapon against the U.S. dollar’s preeminent reserve currency.
Following World War II, 44 countries, to become known as the London Gold Pool, agreed to maintain their currency to a fixed U.S. dollar exchange rate. This was known as the Bretton Woods Agreement. At the time, only the U.S. dollar had the strength to deal with the demands of international trade. The global demand for the U.S. dollar grew as the gold-backed currency flooded the globe. By the 1950s, U.S. gold reserves had decreased considerably.
In the 1960s, the Vietnam War continued to escalate, and U.S. military spending skyrocketed. The deficit continued to increase. Several planes filled with gold were flown from the U.S. to London as the London Gold Pool sold tons of gold per day. As the gold reserves of member countries drained, these countries objected to paying for the U.S. war and social reform efforts.
This created a two-tiered gold pricing system. Member countries would maintain a price of $35 per ounce, while free-market investors could purchase gold at market value. By 1971, President Nixon officially ended the gold standard. The dollar was no longer backed by hard value as the tie between the U.S. dollar, and gold was severed on a global level.
Following the end of the gold standard, President Nixon and oil-rich Saudi Arabia agreed that countries could purchase oil only with U.S. dollars. The petrodollar was born, and the U.S. dollar became the world’s reserve currency.
With being the world’s reserve currency came certain privileges, such as easy and cheap borrowing. Needless to say, this led to increased resentment. For the past several decades, the U.S. dollar has dominated international trade and the value of other country’s reserve currencies. This “privilege” continues to this day. But the dollar has not retained its worth, especially following the collapse of the gold standard. It has lost 96 percent of its value through inflation. This inflation has affected most other countries, who are holding dollars in reserve. The establishment of the Euro can be seen as a direct protective measure against the devalued dollar.
A store of value is the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when recovered…
Sound familiar? #GoldmoneyResearch pic.twitter.com/esncOHdJyY
— Goldmoney Research (@GMoneyResearch) April 29, 2019
Tensions between the U.S. and Saudi Arabia had led the oil-rich nation to threaten that it will accept currencies other than the dollar for its oil, contrary to the original U.S. – Saudi Arabia agreement. Were this to happen, it would severely affect the U.S. economy and its position as the world’s reserve currency leader.
China and Russia have already initiated oil trades in yuan and rubles. The EU has initiated a payment system with Iran that circumvents President Trump’s sanctions. The value of the U.S. dollar is being eroded globally as many countries as setting up defensive measures.
Economically, there is no greater economic defense than gold. As countries increase their gold holdings and rid themselves of U.S. debt, their reliance on the U.S. dollar decreases exponentially, a trend which could send the U.S. dollar crashing. This, precisely, is the goal of the recent worldwide gold hoarding. The message that the world is sending to the U.S. is clear: we will no longer be ruled by the U.S. dollar. Not only is the value of the dollar decreasing, but so is the power of the U.S.
The future of global currencies is unknown. But it is certain that gold will continue to play a major role in global trade. And the rest of the world is continuing to increase its gold reserves. Where that leaves the U.S. dollar is anyone’s guess.