Gold prices have soared recently thanks to massive central bank buying – a signal that the precious metal is increasingly seen as a geopolitical hedge.
“After years of shocks, including the Covid-19 pandemic and Russia's invasion of Ukraine, countries are re-evaluating their trading partners based on economic and national security concerns,” said Gita Gopinath, Director General deputy of the IMF.
In particular, some countries are rethinking their heavy reliance on the US dollar in their international transactions and foreign exchange reserves, she said.
Demand for gold has increased because it is seen as a “politically neutral safe asset, which can be stored at home and safe from sanctions or seizures,” Gopinath said.
Central banks accounted for a quarter of gold demand in 2022 and 2023, with institutions buying more than 1,000 tonnes of gold each year, according to the World Gold Council in a recent report.
Central banks around the world have continued to buy gold, grabbing 290 tonnes of gold in the first quarter of this year – the strongest start to a year on record, according to the council.
Gold as a hedge against the risk of sanctions linked to the US dollar
Concerns about the outsized influence and power of the U.S. dollar over the global economy have been brewing for years. The series of unprecedented sanctions from the West and militarization of the dollar against Russia over the invasion of Ukraine have increased pressure for a dedollarization.
Certainly, the greenback is so entrenched in the global economy that most experts don't expect it. lose one's dominance and the status of global reserve currency in the near future.
But countries around the world – particularly those aligned with China – are increasingly hedging their political risks by stocking up on alternative assets, and particularly gold.
The share of gold in the foreign exchange reserves of the The “China bloc” has been on the rise since 2015, said the IMF’s Gopinath. Apart from Russia, she did not name any other country in the “Chinese bloc”.
On the other hand, the share of gold in the foreign exchange reserves of the “American bloc” countries has remained generally stable.
This suggests that gold purchases by some central banks may have been driven by concerns about the risk of sanctions, Gopinath said.
In the case of China, the share of gold in its foreign exchange reserves increased from less than 2% in 2015 to 4.3% in 2023. At the same time, its share in US Treasury and agency bonds fell from 44% to around 30%, according to IMF estimates. Gopinath.
Central banks will continue buying despite high prices
While gold purchases by China's central bank are making headlines, other central banks are also stocking up on gold. The World Gold Council wrote in its recent report that other major buyers of gold included Turkey and India.
J.P. Morgan Analysts wrote in a March report that they expected central banks to continue their buying pace this year while being “less price sensitive.” This means that gold prices are expected to remain high this year.
Of course, the ongoing gold rush is not based solely on geopolitics.
The current surge in the price of gold is also favored by a strong dollar, which encourages certain emerging countries to hedge their exchange rate risks. In China, people also buy gold to protect against domestic economic uncertainties.
THE gold spot price is currently around $2,340 an ounce, down from its record high of over $2,400 an ounce in April.