America is no longer reliable, central banks start throwing dollars away

Jakarta, CNBC Indonesia – The Central Bank of China (People’s Bank of China / PBOC) has taken a strategic step by buying gold since last November. This policy has been one of the triggers for the soaring gold price over the past two months.

The World Gold Council (WGC) on Friday (6/1/2023) reported that the PBoC bought 32 tons of gold in November 2022. This purchase is the first time since September 2019 or more than three years ago.

Then, at the end of last week, the PBoC announced the purchase of 30 tons of gold in December 2022. Thus, in two months, the PBoC bought 62 tons of gold.

Not only China, other central banks also bought gold last year. WGC reported that the purchase amount was the largest in 55 years.

Andrian Ash, head of research at BullionVault, said the United States (US) and allies freezing Russia’s foreign exchange reserves in US dollars was one of the triggers for central banks to buy gold again.

“The central bank’s return to gold demonstrates the current geopolitical backdrop of distrust, doubt and uncertainty after the US and allies froze Russia’s foreign exchange reserves in dollar terms,” ​​Ash said quoted by the Financial Times, Thursday (29/1/2022).

As is known, the war brought Russia many sanctions, including the freezing of the Russian central bank’s foreign exchange reserves placed abroad.

At the time, Russia’s foreign exchange reserves totaled $643 billion, most of which was placed with US, European and Chinese central banks at an estimated $492 billion. Forbes.

The move by the US and its allies has led many central banks to slowly “throw away” the US dollar. Because, if there is tension with the West, the same thing may happen to them.

In addition to Russia, China is often contrasted with Uncle Sam’s country.

“The message that central banks are sending by buying a lot of gold is that they don’t want to depend on the US dollar as the main resource in foreign reserves,” said Carsten Menke, head of next generation research at Julius Baer.

Meanwhile Bernard Dahdah, senior commodity analyst at Natixis, said deglobalization and geopolitical tensions mean central banks outside the West will continue to diversify their foreign exchange reserves and further reduce the US dollar, a trend that is not expected to change for at least a decade.

The US dollar is indeed very dominant in the world, being the most used currency in international trade. Asset prices are also mostly pegged the greenback.

Based on data from the Atlantic Council citing data from the US central bank (Federal Reserve/The) over the period 1999-2019, the use of the US dollar in international transactions in the North and South America region reached 96 .4%. Then in Asia Pacific the value reaches 74%.

The share of the use of the US dollar is only minor in Europe, at 23.1%. Understandably, Europe has a single currency, the euro, whose contribution to export-import trade in Europe reaches 66.1%.

In the rest of the world, the use of the US dollar stands at 79.1%. Not to mention its share of global foreign exchange reserves which is almost 60%, it is clear how the dominance of the US dollar is in the financial world.

The vital role of the U.S. dollar in the global financial world made the United States called “super-high privileges” by French finance minister, Valéry Giscard d’Estaing in 1965.

The US dollar which is very dominant in the world offers a great advantage for the Superpower Country. US government bonds will always be in demand, they can even be issued with a low coupon.

Huge capital flows to the United States could close current account and budget deficits. Also, with the US dollar’s vital position, many say the US is using it as a weapon to put pressure on other countries. It can also be used to harm a country’s economy.

Therefore, it is not surprising that many central banks have started to reduce the share of US dollars in their foreign exchange reserves.

[Gambas:Video CNBC]