Kyrgyzstan Is Buying Gold to Shield Itself from the Trade War

What do you do if one of your biggest trading partners is embroiled in a trade war and the other faces economic sanctions?

Buy gold.

That’s exactly what Kyrgyzstan’s central bank is doing. 

The former Soviet republic has set out to convert at least half of its $2 billion in international reserves into gold.

Kyrgyzstan’s central bank governor Tolkunbek Abdygulov told Bloomberg that holding its reserves in the yellow metal provides economic security and decreases the country’s exposure to international financial risks.

The rules of the game are changing. It doesn’t matter what currencies we have in our reserves; dollars, yuan or rubles all make us vulnerable.”

Kyrgyzstan relies heavily on China and Russia for imports. With the trade war between China and the US escalating, and Russia burdened by economic sanctions, the small central Asian country is seeking the independence and stability that come from holding gold. Unlike fiat currencies such as yuan, dollars and rubles, gold has no counter-party risk. In other words, its value isn’t dependent on the economic stability of the issuer.

Gold ranks as Kyrgyzstan’s biggest export. Since 2014, the government has adopted a policy to buy as much of the country’s domestic gold as possible.

Abdygulov said holding gold is simply a matter of economic security and flexibility. With large reserves of the yellow metal, the country can easily convert it to any other currency as circumstances dictate.

If we decide to sell gold, then we can easily sell it and convert into the currency we need. Taking into consideration that we mine a lot of gold in our country, it’s God-given that we should keep a large part of our reserves in gold.”

Kyrgyzstan isn’t the only country hoarding gold in an effort to limit its exposure to the dollar and other fiat currencies. Earlier this month, the Bank of Mongolia launched a campaign dubbed the “National Gold to the Fund of Treasuries” to encourage miners and individuals to sell gold to the central bank, along with commercial banks, in order to increase their gold reserves.

Last month, Jim Rickards described an evolving “axis of gold” as a number of countries, including China, Russia, Turkey and Iran increasingly use physical metal to create an offensive counterweight to the US dollar.

For instance, Turkey went on a gold-buying spree in 2017 and that trend continued into 2018. Meanwhile, Russia has tripled its gold reserves in the last ten years. Another former Soviet republic – Kazakhstan – has hoarded a large amount of gold. It currently holds more than 43% of its reserves in the yellow metal.

Many of the reasons central banks are holding gold also apply to individuals. The yellow metal has also historically afforded investors a hedge against currency volatility, liquidity, and independence from the global financial system.

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