According to newly released data from the State Administration of Foreign Exchange, China’s central bank grew its gold reserves for the sixth straight month in April 2023, continuing a trend of diversifying away from its U.S. dollar assets. China is not alone, as de-dollarization has gained popularity among several nations, contributing to increased gold demand among central banks.
The dollar’s strength is under duress.
The dollar fell in six of the last seven months and has lost 12% since late September 2022, according to data from the U.S. Dollar Index. In a research note published on May 5, 2023, UBS global wealth management CIO Mark Haefele said, “We continue to believe that the greenback will weaken further against key counterparts over the next 6–12 months, and it remains to us a least preferred currency.”
The current debate in Congress over the U.S. debt ceiling may further hurt the dollar, according to some strategists. Tom Nakamura, a currency strategist and co-head of fixed income at AGF Investments in Toronto said, “Each successive episode of debt-ceiling drama adds reasons for investors and officials from around the world to look at the U.S. and worry about its credibility and its reserve status.”
De-dollarization is gaining steam internationally.
Typically, international trade is done in U.S. dollars, the world reserve currency. But on May 9, 2023, Business Insider reported that the largest hardwood pulp producer in the world, Brazilian company Suzano S.A., is considering doing business with China using yuan rather than dollars. Hardwood pulp, which is used to make toilet paper and tissues, is only the latest commodity that may see more international trade in yuan rather than the dollar.
International Crisis Group co-chair Frank Giustra said that de-dollarization could be a national security concern. In statements published on May 3, 2023, Giustra said, “Despite America’s likely opposition, de-dollarization will persist, as most of the non-Western world wants a trading system that does not make them vulnerable to dollar weaponization or hegemony. It’s no longer a question of if, but when.”
Gold is increasingly gaining popularity among central bankers abroad as a substitute for the dollar.
Central banks around the world are boosting stockpiles of gold amid a growing backlash against the dollar. Aside from China, Singapore, Turkey, and India are major gold purchasers.
Central banks purchased 228 tons of gold in the three months leading to the end of March 2023 according to the World Gold Council. This is the largest amount of gold purchased in a first quarter according to data going back to 2000. On an annual basis, central bank gold buying reached an 11-year high in 2022.
Movement away from the dollar to gold appears to be happening on a large macroeconomic scale and may contribute to higher gold demand.
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