China’s central bank (People’s Bank of China / PBOC) took a strategic step by buying up gold since last November. This policy was one of the triggers for the skyrocketing price of gold in the last two months.
The World Gold Council (WGC) on Friday (6/1/2023) reported that the PBoC purchased 32 tons of gold in November 2022. This purchase is the first time since September 2019 or more than three years ago.
Then at the end of last week, the PBoC announced the purchase of 30 tons of gold in December 2022. Thus, in two months the PBoC bought up 62 tons of gold.
Not only China, other central banks also bought up gold last year. WGC reported the purchase amount to be the largest in the last 55 years.
BullionVault research head Andrian Ash said the United States (US) and allies who froze Russia’s foreign exchange reserves in US dollars were one of the triggers for central banks to buy up gold again.
“Central bank moves back into gold demonstrate the current geopolitical backdrop of distrust, doubt and uncertainty after the United States and allies froze Russia’s foreign exchange reserves in dollar terms,” Ash said as quoted by the Financial Times, Thursday (29/1/2022).
As we know, the war resulted in Russia being given many sanctions, including the freezing of Russia’s central bank’s foreign exchange reserves placed abroad.
Russia’s foreign exchange reserves at that time amounted to US$ 643 billion, most of which were placed in the US, European and Chinese central banks with an estimate of around US$ 492 billion, reports Forbes.
The move by the United States and its allies led many central banks to slowly “throw away” the US dollar. Because, if there is tension with the West, it is possible that the same thing will happen to them.
Besides Russia, China is often at odds with Uncle Sam’s country.
“The message that central banks are giving out by buying a lot of gold is that they don’t want to depend on the US dollar as the main asset in foreign reserves,” said Carsten Menke, head of next generation research at Julius Baer.
Meanwhile Bernard Dahdah, senior commodities analyst at Natixis said deglobalization and geopolitical tensions mean that central banks outside the West will continue to diversify their foreign exchange reserves and further reduce the US dollar, a trend that is not expected to change for at least a decade.
The US dollar is indeed very dominant in the world, being the currency most used in international trade. Asset prices are also mostly pegged to the greenback.
Based on data from the Atlantic Council citing data from the US central bank (Federal Reserve/The) in the period 1999-2019, the use of the US dollar in international transactions in the North and South America region reached 96.4%. Then in Asia Pacific the value reaches 74%.
The portion of the use of the US dollar is only smaller in Europe, namely 23.1%. Understandably, Europe has a single currency, namely the euro, whose contribution to export-import trade in Europe reaches 66.1%.
In the rest of the world, use of the US dollar stands at 79.1%. Not to mention seeing its share in global foreign exchange reserves which is almost 60%, it is clear how the dominance of the US dollar is in the financial world.
The vital role of the US dollar in the global financial world made the United States called “sky-high privileges” by the Minister of Finance of France, Valéry Giscard d’Estaing in 1965.
The US dollar, which is very dominant in the world, provides a big advantage for the Superpower Country. US government bonds will always be in demand, they can even be issued with a low coupon.
Huge capital flows to the United States could patch ongoing current account and budget deficits. In addition, with the vital position of the US dollar, many say the United States uses it as a weapon to pressure other countries. It can even be used to damage a country’s economy.
Thus, it is not surprising that many central banks have started reducing the portion of US dollars in their foreign exchange reserves.