Central banks stash gold as if there is no tomorrow

Central banks are diversifying their foreign exchange reserves with gold due to uncertainty. “The outlook for the economy and financial markets is uncertain. I find it a dreadful cliche because it’s always, by definition, true. As an investor, you can’t do anything with it. Yet, I am inclined to say that the uncertainties are exceptionally significant now.

Think about the predicted recession that seems to be happening in the EU but not in the United States. Or consider the combination of global debt that has grown significantly in recent years and the sharply rising interest rates. Or think about the volatility of energy prices in recent years, or the fact that European energy prices are now structurally much higher than those in the United States.

This must have an impact on the competitive position of the European industry. And I haven’t even mentioned the uncertainty caused by the massive monetary easing that Western central banks have implemented in recent years, the consequences of which we will have to wait for in the long term.

A threat to the US hegemony

Apart from these issues, important geopolitical developments are at play, which partly materialize in the economic and financial policies of governments and central banks. The economic and financial hegemony of the United States is being challenged. Brazil, Russia, India, and China are the original BRIC countries. The group has evolved into a fairly loose cooperation. South Africa joined in 2010, and recently Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates followed suit.

These countries no longer accept the leading role of the Americans. They, along with some other emerging countries, are strengthening their economic and financial relationships while reducing them with the United States. The Chinese have not been buying US government bonds for a long time, and more recently, Saudi Arabia seems to be following the same path. For now, this is not a problem for the US, but Washington is probably not thrilled.

Occasionally, it is suggested that the BRICS countries want to introduce a common currency. I don’t see that happening. The group is far too heterogeneous, especially with the new six members. By forgoing their own currency and exchange rate, they would burden their national economies with useless rigidity that can cause significant damage.

However, they do want to reduce the dependence on and dominance of the US dollar, especially now that in the sanctions against Russia, it has become evident that the Americans are using the international role of their currency as a geopolitical weapon. Therefore, it is interesting to see how countries hold their international reserves. Russia, China, India and even US-aligned countries stash gold.

The price of gold has not seen spectacular growth in the last year and a half. Perhaps that’s disappointing for gold investors. However, it should be noted that interest rates have risen significantly since the beginning of last year, making gold less attractive compared to interest-bearing assets.

The fact that the price of gold has not declined may imply that the increased uncertainty about the economy, financial markets, and geopolitical relations offers sufficient compensation.

About the author: David Foster

With a background in international relations and a deep understanding of strategic intelligence, David Foster is a sought-after commentator on global security dynamics.

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