China has increased its gold reserves by buying an additional 16 tons of the metal in May. With a trade war between the U.S. and China a real possibility, China is divesting itself of the U.S. dollar in favor of physical gold. China has been buying gold since the beginning of the year. According to Helen Lau of Argonaut Securities (Asia) Ltd., China is expected to purchase a total of 150 tons of gold by year-end.
This may explain why the London Bullion Market Association will be holding its annual meeting in Shenzhen, China this year.
China is not the only country that has been buying up gold. Many other countries have decided to trust in gold, as well. The primary reason is that these countries are anticipating – or hoping for – the end of the U.S. dollar as the global reserve currency. During the first five months of 2019, global central banks have purchased an unprecedented 145.5 tons of gold, an increase of 68 percent over the previous year. This exceeds the amount of gold central banks have bought in the last six years.
In addition to China, Russia has also been on a gold-buying frenzy. Last year, the Russian Central Bank purchased 274.3 tons of the precious metal. Concurrently, it dumped almost 85 percent of is US treasury bonds.
Other countries that are purchasing gold are Ecuador, Colombia, Qatar, Kazakhstan, and Serbia.
Why have countries around the world developed a recent craving for gold? Simply stated, gold has been a trading asset for 5,000 years. It has maintained its universal value throughout history. It is the one asset to which the world invariably turns, especially in times of economic need.
By accumulating gold, these countries are making it clear that they no longer trust the U.S. dollar as the world’s reserve currency. They believe that the U.S. is using the dominance of the U.S. dollar to manipulate other economies. It is, therefore, in their interest to increase their gold holdings and devalue the U.S. dollar.
According to former Iranian Foreign Minister Mohammad Javad Zarif, “This is what I believe is happening to the international community…that is people think twice before they talk to the United States because they know that what they agree today may not hold tomorrow.”
The bottom line is, gold will always represent a hedge against economic and political erosion. While throughout the twentieth century, global economies have been tied to the U.S. dollar, many countries are stepping away, and that makes gold exceedingly attractive. Being tied to the U.S. is no longer seen as advantageous by the global community.
The global tie to the U.S. dollar worked when said U.S. dollar was backed by gold and held real, intrinsic value. But the U.S. dollar hasn’t been tied to gold since President Richard Nixon abolished the gold standard in 1971. Instead of a gold standard, Nixon made a deal with Saudi Arabia that excess profits from oil would need to be invested in the U.S. That meant that oil was being traded only in U.S. dollars. This increased the global need for U.S. dollars through massive manipulative tactics.
According to the head of Russia’s second-largest bank, “The reign of the dollar must end…This whip that the Americans use in the form of the dollar would then, to a great extent, not have such a serious impact on the global financial system.”
The U.S. dollars was once a force to be reckoned with. But will it be able to withstand the undisputed power of gold, which has survived and thrived for 5,000 years? And what will happen to the U.S. when the value of the dollar gradually erodes?