Central banks have been accumulating the precious metal at a record rate
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.
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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.