August 22, 2019, 1:15


How Countries Drifting From Dollar to Multicurrency System Using Gold as Hedge

How Countries Drifting From Dollar to Multicurrency System Using Gold as Hedge

Global central banks have stepped up their gold purchases. Tatiana Fic, the director of Central Banks and Public Policy at the World Gold Council and Ronald-Peter Stoeferle, a fund manager at Incrementum AG, have commented on the trend foreseeing a further drift from the US dollar and the emergence of a global multi-currency system.

Serbia and the Philippines have joined the club of gold bullion buyers amid the worldwide surge of interest in the precious metal. According to the World Gold Council, the UK-headquartered market development organisation for the gold industry, net buying of gold by central banks across the world has reached its highest level.

“The recent purchases by Serbia and the Philippines are part of a wider trend of growing gold purchases by central banks”, said Tatiana Fic, the director of Central Banks and Public Policy at the World Gold Council. “Central bank purchases of gold totalled 651 tonnes last year, the highest level under the existing international monetary system. In 2018, central banks added more gold to their foreign reserves than at any time since the end of Bretton Woods and the suspension of US dollar convertibility into gold nearly 50 years ago”.

According to Fic, “the increase in central bank gold demand is being driven by a combination of geo-political and economic factors, as well as structural changes in the global economy”.

The World Gold Council believes that some central banks’ gold-buying spree indicates an intent to hedge against a potential shift in the international monetary system.

Fic pointed out that the vast majority of gold demand has been coming from Asian countries with strong trade and investment ties with the People’s Republic of China, and, specifically those located along the Beijing-led Belt and Road Initiative. She suggested that in the future these countries are likely to increase their allocations in the Chinese currency, the renminbi (RMB). 

In addition, countries that had not been buying the yellow metal for many years have returned to the market: “These include, inter alia, Hungary and Poland, the first EU countries to buy gold for a long time”, Fic remarked.

She highlighted that the recent trend represents a shift in the global pattern as previously central bank demand was highly concentrated in Russia, China, and Kazakhstan.

“As a result, we may see the international monetary system moving towards a multicurrency system and the regionalisation of reserve currencies”, Fic presumed. “Any such shift can be both de-stabilising and dollar negative. Gold can serve as a hedge against both”.

Many Countries All Over the Globe are De-Dollarising, Repatriating Gold

For his part, Ronald-Peter Stoeferle, a fund manager at Incrementum AG and one of the authors of the 13th annual In Gold We Trust report, opined that the global surge in gold demand is nothing short of “a bigger de-dollarisation trend”.

“It seems that many countries all over the globe are de-dollarising; they are basically diversifying from the US dollar. It is not only Russia, it is also Kazakhstan; it is China, of course; recently it was Hungary and also Poland, so also countries from the European Union. This shows lack of trust in the US dollar”, Stoeferle emphasised.

The US-driven tariff and sanctions spree have prompted some countries to turn their back on the US dollar. Thus Russia, China, Turkey, Iran, India and Venezuela are increasingly shifting to national currencies in bilateral trade. Moscow even kicked off a “de-dollarisation” programme in response to Washington’s stepping up sanctions against the country over the alleged meddling in the 2016 US presidential election, something that Russia vehemently denies.

Stoeferle highlighted that apart from acquiring bullion some countries are increasingly repatriating their gold reserves.

“Many countries are trying to get back their gold holdings that are stored internationally”, he stressed. “This is also a big sign of the loss of confidence and trust in counter-parties and in the global financial system”, Stoeferle says.

In late May, Vecernje Novosti, a Belgrade-based Serbian newspaper, reported that the country is due to increase its gold from 20 to 30 tonnes in 2019, stepping them up to 50 tonnes in 2020. For his part, Philippine President Rodrigo Duterte has signed a law stipulating that all gold produced by small miners in the country should be sold to the central bank at around world market prices in a bid to increase the Philippines gross international reserves.

Meanwhile, Russia and China doubled down on purchasing the precious metal in the first quarter of 2019 buying 55.3 and 33 tonnes, respectively. According to the World Gold Council’s May report, Russia’s gold reserves are now at 2,168.3 tonnes and rank sixth in the world, while China holds 1,885.5 tonnes.

In 2017 the German Central Bank finalised the repatriation of half of its bullion reserves from the Federal Reserve, the Bank of France and the Bank of England, leaving 1,200 and 430 tonnes of its precious metal in the US and the UK, respectively. As of May 2019, Germany’s gold reserves amount to 3,369.7 tonnes.

In April 2018, the Turkish Central Bank signalled that it would bring its 220 tonnes of gold home from the US amid the ongoing diplomatic row between Washington and Ankara over the Turkey Halkbank case and Middle Eastern affairs.

Not all the countries’ repatriation efforts have succeeded so far. In January 2019, the government of the legitimate Venezuelan president, Nicolas Maduro, faced a refusal from the Bank of England while trying to repatriate its gold from the UK amid the ongoing political crisis in Venezuela fanned by the US and its allies who are backing self-proclaimed interim president, Juan Guaido.

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