Why Central Banks Are In A Gold Rush Amidst Global Trade Wars

The ongoing trade war between the US and China has heightened global uncertainty making gold a useful hedge for most countries.Central banks across the globe have been buying larger quantities of the precious metal, a phenomenon not been seen since 1971. They added 651.5 tonnes to their treasure chests in 2018, a 74% increase over the previous year, according to a World Gold Council (WGC) report.

Central bankers are attracted to gold because no one knows how the ongoing trade disputes will be resolved; nor how Brexit will turn out. If the trade disputes get out of hand, and if there’s stress in the global economy, naturally, the dollar will appreciate. Conversely, emerging market currencies could be at risk. So, anyone would like to hold gold against currency volatility, including central banks.

Countries such as Russia, Turkey, Kazakhstan and Poland were the biggest buyers of gold in 2017. Its price has now risen 11% from the lows of end-September with more countries buying the yellow metal. Gold has become a useful safe-haven contra strategy because It is reasonably liquid and a global store of value.For most countries, it does not help to hold more dollars if the trade is not being routed through dollars.

Now global trade wars are giving rise to another phenomenon countries are increasingly resorting to trading among themselves through bilateral agreements. As a result, the dollar trade is now shifting to bilateral currency-based trades. This reduces the need for countries to hold dollar reserves.Much of the globe is starting to move away from the dollar.

Besides, since EM currencies fell against the dollar last year, these economies particularly benefited from holding gold. If you were holding gold in Turkey or Argentina last year or Brazil and Russia, and even India, you would have obtained fantastic returns in local currency terms. So, I would say that gold is in a bit of a sweet spot as far as central banks are concerned.

Argentina’s gold prices doubled last year in local currency terms. In India, the rupee’s slower fall has meant that gold managed a modest 7.48% return last year.Analysts reckon that gold could consolidate now but with stress points across the global economy Gold will be their safe haven.

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