us dollar – global currencies, monetary geopolitics 10-1-23 BRICS undermine dollar hegemony with gold purchases – Central banks have been accumulating the precious metal at a record rate – by PhilipPilkington

Just before the New Year, the Financial Times ran a piece noting that central banks were accumulating gold at a rate not seen in 55 years. In the third quarter of 2022, analysts estimate that almost 400 tonnes of gold were bought by central banks. That much gold would take around 16 semi-trailer trucks to transport.

In November, traders in the gold market noted that there was a huge buyer entering the market and purchasing very large volumes of gold — a so-called ‘whale’. In December it was revealed that this whale was the Chinese central bank. But it wasn’t just the Chinese buying gold. Other buyers include Turkey, India, Uzbekistan, Egypt, Qatar, and Iraq. It is worth noting that many of these countries have expressed an interest in joining the BRICS+ alliance.

Why are central banks snapping up gold? Most commentators recognise that it is due to geopolitical turmoil. Jonathan Guthrie at the FT, for example, argues that “gold is the currency of fear and mistrust,” and that “the democratic west and the authoritarian east are pulling apart amid mutual recriminations”. Guthrie is certainly correct that a geopolitical schism is taking place, but since when is gold the currency of mistrust? Throughout history gold-backing has been used to buttress trust in currencies — when sterling was the global reserve currency it was said to be “good as gold”.

Our period of paper currency is the exception rather than the rule, and it only started in 1971 when the US dollar link to gold was broken. It was 1967 which saw levels of gold purchases by central banks comparable to what we observed at the end of 2022. All of this raises the obvious question: what if these purchases signal the beginning of the end of the paper dollar as the global reserve currency?

It seems unlikely that the countries buying gold are going to try to give their currencies gold backing. But it appears probable that the immediate cause of the rush for gold is an attempt to diversify out of dollars. Since the United States seized Russia’s dollar reserves after the invasion of Ukraine last year, other countries have grown distrustful of holding dollars as they fear that they, too, could see their reserves seized in the future. Hence the race for gold.

Perhaps there is no plan behind the current gold rush, but it may be read in retrospect as the beginning of the evolution of a new global monetary order. It could be the first step toward this reshaping of the landscape, as countries around the world try to find alternatives to the dollar. The West is learning a hard and fundamental lesson: financial systems are built on trust, and if they are weaponised they lose the trust required to maintain their dominance. It would be strongly in our self-interest to attempt to rebuild faith in our financial system if we want to protect our global power. 2/4/2021 The US dollar’s hegemony is looking fragile – The modernisation of China’s exchange-rate system could deal the currency a painful blow by Kenneth Rogoff 7/2020 It Is Time to Abandon Dollar Hegemony Issuing the World’s Reserve Currency Comes at Too High a Price By Simon Tilford and Hans Kundnani  2019  WORLD CURRENCY: WHO NEEDS A NUMERAIRE?  By  Tom WilsonMarc Jones

“… How Global Currencies Work is the work of Barry Eichengreen, Arnaud Mehl, and Livia Chitu. Mehl and Chitu are both economists at the European Central Bank. Eichengreen is a professor of economics and political science at the University of California, Berkeley. Their hypothesis is that it is perfectly possible for a plurality of currencies to share the global stage.  This is an important thesis, to which currency traders and speculators might want to pay attention. It means, among much else, that the PRC’s renminbi and the US dollar are not necessarily engaged in a sort of iron-cage death match. The rise of the former need not mean the demise of the latter.  Further, this new take on global currencies doesn’t make the Bretton Woods Conference out to be as earth shaking an event as is often thought.     ….    (The) data does not show quite the London-centered financial world presumed by the conventional account. At the beginning of that period, sterling accounted for 64% of reserves, with Germany’s mark and France’s franc also constituting “non-negligible shares.”  …   For a new player to take central stage within a decade indicates, to these authors, that the lock-in or network effects are not as powerful as they are sometimes made out to be. They were not working for the pound.