The world bought 4,345.1 tonnes of gold in 2018, up from 4,159.9 tonnes in 2017, according to the World Gold Council’s (WGC) latest quarterly demand trends report. Central banks accounted for most of the gold buying this year, adding another hint of growing global financial, economic and geopolitical tensions. This historical gold buying is exclusive to Eastern nations, while Western nations’ gold reserves remain unchanged or moved in the opposite direction. The most drastic example is Canada, which officially sold all of its gold holdings in 2016.
“[Central banks] bought 651.5 tonnes in 2018, an impressive 74 percent increase over 2017, and as previously stated, the largest increase since 1967,” Nathan Mcdonald reported to Sprott Money News.
The most significant central bank buyers were Russia, India, China, Poland, Kazakhstan and Turkey, a continuing trend of non-Western states diversifying out of U.S. Dollar (USD) holdings due to increasing militarization of USD denominated assets via sanctions in recent decades.
Since the Bretton Woods conference in 1944, the United States’ dollar assumed the role as world reserve currency. When the USD went from backed by gold to fiat—or decree from the state—it was a pivotal shift in international markets. As the new international order continued into the 1960s, the United States’ central bank, the Federal Reserve, began feeling the effects of the Triffin Dilemma—a process noted by International Money Fund (IMF) economist Robert Triffin.
The dilemma centers around the inherent contradiction of the USD’s (or any national currency) role as world reserve currency. In order for international demand for USD to be met, the United States is forced to have a negative balance of payments or trade relationship with global markets. This means that the U.S. has to import more than they export. The problem is that a negative balance of payments hurts the dollar’s value in the long run, while the dollar needs to hold its value in order to fulfill its role as world reserve currency.
The contradiction came to a point in 1968, when France came to collect its gold from the United States by sending a warship to New York Harbor as an acknowledgement of their serious intent. France did not want dollars because they were not holding their value, and their gold was continuing to increase in real market value. The USD officially went off the gold standard a few years later, unable to redeem dollars for gold.
Today, gold buying central banks are hedging against USD denominated assets entirely.
Information for this article was gathered from reuters.com, zerohedge.com and sprottmoney.com.