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Dollar Worries Spur Central Banks to Buy Gold

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For the last 10 years, central banks have been on a gold-buying spree. At least some of them have.

On net, central banks globally added 193.3 tons of gold during the first half of 2018, according to World Gold Council data. That represents an 8% increase over 2017. The last time we saw this kind of central bank buying was in the 1950s, but as a report published by Forbes points out, the motivations are much different now than they were then.

In the distant past, central banks had to buy gold because of its vital role in the global financial system. Now they are choosing to do so because they are worried about the dollar. In other words, they’ve been scared into this bullion buying binge.”

When you look at the countries adding gold to their reserves, it becomes pretty clear this is true. Russia leads the pack. The Russian central bank added 26.1 tons of gold to its hoard in July.  Russian gold reserves increased 224 tons in 2017, marking the third consecutive year of plus-200 ton growth. In February, Russia passed China to become the world’s fifth-largest gold-holding country. (China has not officially added to its reserves  since 2016, but many speculate the Chinese might secretly stockpiling the yellow metal as well.)

But Russia and China aren’t alone. India’s central bank bought gold for the first time in more than a decade during its last fiscal year. Other countries adding to their gold reserves include Egypt, Indonesia, Kazakhstan, the Kyrgyz Republic, Mongolia, Serbia, Surinam, Tajikistan and Turkey.

As the Forbes article points out, the end of gold’s vital role in trade came in 1966 as individuals started to demand gold in exchange for their dollars. Eventually, they were shut out just as countries were excluded. The final blow was Pres. Nixon closing the gold window in 1971.

What this all means is that since 1965, when the gold standard started to look iffy, central banks have mainly sold their metal. In 1966, they dumped more than 45 million ounces, and many years sales were more than 10 million ounces annually. Over the period of 1966 through 2007 central banks mainly ditched their gold holdings. That is to say, they sold right up until the global financial crisis really hit home in 2008.”

In the midst of the Great Recession, some central banks started buying gold. They added 580,000 ounces in 2008 and 210,000 in 2009. The buying pace accelerated over the next several years. Central banks purchased about 11 million ounces of gold in 2017 and that pace seems to have continued into this year.

Why?

CPM Group managing partner Jeff Christian told Forbes the same thing we’ve been saying over the last several months.

Today central banks are buying gold to diversify their monetary reserves. Most central banks want to diversify away from the dollar.”

This is especially true of countries like Russia who have felt the wrath of US economic pressure. In some cases, the US has “weaponized” the dollar. RT’s Matt Keiser mentioned Columbian drug lord Pablo Escobar during a recent show, noting he used to talk about “plata o plomo,” meaning “silver or lead.” In other words, you give us your silver or you’ll take a bullet. Keiser said that seems to be America’s attitude about the dollar. Either take our greenbacks or suffer the consequences.

As a result of this kind of economic pressure, countries like Russia, China and Iran have been looking for ways to limit their dependence on the US dollar for years. More recently, we’ve even seen American allies looking to de-dollarize the world. Last month, German foreign minister Heiko Maas called for the creation of a new payments system independent of the United States.

Gold has an important role to play in a de-dollarized global economy. It remains unclear what systems will evolve, but it seems clear countries like China and Russia see gold as a source of economic independence. For instance, a Russian lawmaker has suggested his country should develop a gold-backed cryptocurrency for payment of arms exports and other goods as a way to circumvent Western sanctions and limit his country’s dependence on the dollar-based global banking system.

According to Forbes, things have shifted since the decades from 1966 through 2007.

Now when bullion prices are slipping, it might be reasonable to assume that at least some central banks will enter the gold market with orders to buy. That’s quite a turnaround from 20 years ago when consistent selling was the rage in the official sector.”

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