Breakingviews: Some Central Banks Have Gold Fever, and It Might Be Sensible


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Gold bugs aren’t always rational. That’s not the case for central banks, whose purchases of the yellow metal last year were the highest since the United States broke the link between gold and the dollar in 1971. For these institutions, it’s less a short-term gamble that prices of the precious commodity will rise, and more a concern that dollar dominance could gradually be eroded.

Central banks bought 651.5 tonnes of gold in 2018, the second highest annual total on record and up 74 percent from the year earlier, according to the World Gold Council. As in the past three years, Kazakhstan, Russia and Turkey were significant buyers, but were last year joined by the likes of Hungary, India and Poland.

Official foreign exchange reserve managers tend to be tight-lipped. But Hungary in October explained that it had increased its gold reserves tenfold for long-term stability reasons, rather than short-term investment considerations. The precious metal was in limited supply and it had no credit or so-called counterparty risks, because it was not a claim on a specific institution or country.

Such thinking may seem like a version of one reason individual investors stock up on gold: because they are terrified of holding ostensibly riskier assets, like shares and bonds. With geopolitical tensions rife, that would be understandable.

But there are two bigger reasons for central banks to buy gold:

One is concern about America’s use of dollar dominance in the global financial system to exert its authority. Germany, France and Britain have tried to open a new nondollar trade channel with Iran, but it probably won’t be able to significantly subvert United States sanctions against the Islamic Republic. No wonder that the European Commission President Jean-Claude Juncker wants to promote the euro as a global currency, rather than accepting dollar price tags for planes, energy and other goods.

Even more important is the rise of China. Its economy accounts for almost a fifth of global gross domestic product and more than a tenth of global trade, but its currency makes up less than 2 percent of central bank reserves, as the Official Monetary and Financial Institutions Forum points out.

Reserve managers may not know how long it will take for China’s currency, or the euro, to nibble away at the dollar’s pre-eminence. But they are taking small precautionary steps to diversify their exposure away from the dollar. That is far removed from the blind enthusiasm usually associated with gold fever.


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