Gold’s lustre is timeless for Asian buyers, and their central banks are now following suit, snapping up the commodity amid de-dollarisation – a move to reduce exposure to the US dollar.
Fears that their assets are vulnerable following the US seizure of Russia’s $650 billion in foreign exchange reserves in February last year have sparked a wave of central bank buying, according to a report this month from Sprott Asset Management.The report said it signalled a “strong desire to diversify away from the US dollar and US dollar assets”.
This, in turn, has provided a floor for gold, pushing prices to near-historic highs above $2,000 per troy ounce, fuelled by expectations that the Federal Reserve will cut interest rates next year after a cycle of increases over the past year and a half.
“The sanctions imposed by the US administration on several sovereign entities – what some are calling the weaponisation of the dollar – has led vulnerable governments to seek reserve assets that are not directly threatened by the exclusions,” said Ross Norman, CEO of London-based precious metals website Metals Daily.
Talk of de-dollarisation, aimed at ending the hegemony of the US dollar, has grown in prominence over the past year. Malaysian Prime Minister Anwar Ibrahim in April called for a new currency that the Brics nations – Brazil, Russia, India, China and South Africa – could use to settle global trade deals.
China has put more emphasis on the yuan, but its currency lacks the same confidence as the US dollar. Gold has emerged as a credible alternative, especially as it has been seen as a store of value in volatile times such as the Ukraine war and the Israel-Gaza war.
The precious metal has an advantage because it can be bought and sold over-the-counter anywhere in the world, whereas the US dollar may need to be converted by service agents in countries outside the US.
Central bank gold purchases in the July-September period were the third-strongest quarter on record, according to the World Gold Council, although they were down on the year. Year-to-date purchases to the end of October were 14 per cent higher in the latest report.
While China’s central bank was the largest buyer in the third quarter, other significant Asian buyers were Singapore, India and the Philippines. The banks of Russia, Qatar and Kyrgyzstan were also among the buyers.
“They (central banks) are responding to a number of factors, including an ongoing desire to diversify their reserve assets and a perception of higher financial risks,” said Shaokai Fan, the World Gold Council’s head of Asia-Pacific (excluding China) and global head of central banks.
“However, rising geopolitical uncertainty and concerns about sanctions on reserve assets are undoubtedly also important drivers,” he said. Banks either have low gold reserves or “have large US dollar holdings, which may be driving a greater desire to diversify”, he added.
Since the outbreak of the war in Ukraine, central banks have been buying gold at more than two and a half times the quarterly average of the previous decade, the World Gold Council said, noting that their purchases are driven by long-term goals.
“Overall, we expect central banks to continue to buy gold in 2024, but the levels may not reach the record levels we have seen recently,” Fan said.
Central bank buying could stall as gold prices are expected to rise when the Federal Reserve starts cutting interest rates next year. Prices could rise to $2,400-$2,500 an ounce by the middle of next year, said Gnanasekhar Thiagarajan, director of Commtrendz Risk Management in India.
“For sure, banks are likely to slow down as prices rise. They will wait for a price correction,” he said.
Internationally, gold is priced in US dollars. Gold tends to have an inverse correlation with the American currency, the value of which is likely to fall when interest rates are cut.
In the past, central bank buying programmes were “rather price agnostic”, but “these days they are more nuanced and will tend to accelerate purchases when prices are perceived to be cheap”, says Norman.
But he expects “the acquisition of gold by central banks in the developing world to continue apace. In all likelihood, we seem to have a new normal in terms of buying levels.
Banks are increasingly looking at their gold reserves.”Many central banks are realising that their gold holdings may be too low as a percentage of total reserves. Somewhere between 10-20 per cent is generally seen as the ‘right’ balance,” says Martin Huxley, an independent commodities analyst based in the UK.
Despite the de-risking moves, there are likely to be limits to diversification away from the US dollar.
“The US dollar can be parked in interest-bearing assets, whereas gold does not generate income until it is sold,” said Thiagarajan. “Therefore, gold will account for a smaller percentage. The bulk of reserve assets will remain in the US dollar.”
