Global central banks have been buying record amounts of gold as they seek to diversify reserves away from the dollar.
“We expect central banks to continue their role as net purchasers of gold,” according to the head of gold strategy at State Street.
The trend appears to be part of the broader de-dollarization drive, led by countries including China and Russia.
Global central banks have been snapping up record amounts of gold since the start of 2022 – a trend that should continue as countries look to move away from an “overconcentration” of reserves in the dollar, according to State Street Global Advisors.
Monetary authorities across nations made net purchases of 387 metric tons of the yellow metal in the first half of 2023, after buying an unprecedented 1,083 tons the whole of last year, the world’s fourth-largest asset manager said in a recent note.
In addition to reserve diversification, the trend is also driven by central banks’ desire to strengthen balance sheets and increase liquidity without adding credit risk, according to the firm.
“The reasons driving central bank gold purchases — to diversify their reserves, improve their balance sheets, and gain liquidity from an asset without credit risk — likely won’t change given today’s increasing economic and geopolitical risks,” Maxwell Gold, head of gold strategy at State Street, wrote in the note.
“Therefore, as we look ahead, we expect central banks to continue their role as net purchasers of gold,” he added.
The trend appears to be part of a broader international movement – known as de-dollarization – to reduce reliance on the dollar in trade and investment, after the US leveraged the greenback’s supremacy to impose economic sanctions on some countries. China and Russia have led the anti-dollar drive, which also saw the BRICS group of nations weigh the prospect of a shared currency.
“In recent years, the Society for Worldwide Interbank Financial Telecommunications (SWIFT) payments system has been used to impose sanctions, both on Iran in 2015 and on Russia in 2022 — a tactic some have described as “weaponization,”” Gold wrote.
“If a government perceives international sanctions as a real threat, then switching from US dollar assets to an anonymous counter like gold becomes extremely attractive, particularly in scenarios of multi-lateral sanctions by several reserve currency nations,” he added.
Gold buying is only one aspect of de-dollarization – several countries are also seeking to boost the role of their own currencies in cross-border transactions. China and India have initiated trade arrangements to be settled in their respective tenders, while Indonesia recently formed a National Task Force to widen the use of local currency transactions with partner countries.
De-dollarization is an “irreversible process” that’s gaining momentum, Russian president Vladimir Putin said in a video address at the BRICS summit in August.
While some experts perceive the anti-greenback efforts as a growing threat to the US currency, others have dismissed the movement as a nothingburger.