Banks need politically neutral gold
Gold prices have risen sharply recently, driven by significant central bank buying. This trend suggests that the precious metal is increasingly seen as a geopolitical hedge, especially in the face of sanctions, reports Business Insider.
An International Monetary Fund (IMF) official recently noted that gold could play a critical role in the potential fragmentation of the global economic and financial system. In light of recent disruptions such as the COVID-19 pandemic and the military conflict between Russia and Ukraine, many countries are re-evaluating their trading partners based on economic and national security considerations.
In particular, some nations are reconsidering their heavy reliance on the US dollar for international transactions and currency reserves. The rising demand for gold is largely due to its perception as a politically neutral and safe asset that can be held domestically and protected from sanctions or confiscation.
Central banks accounted for a significant portion of global gold demand in 2022 and 2023, buying more than 1,000 tonnes annually, according to a recent report by the World Gold Council. The first quarter of 2024 was also the strongest first quarter on record for gold purchases.
The use of the dollar as a political bargaining chip, particularly against Russia in the Ukraine conflict, has accelerated the move towards de-dollarisation. However, the US dollar remains deeply embedded in the global economy and most experts do not expect it to lose its dominance and status as the world's reserve currency in the near future.
Nevertheless, countries around the world, particularly those allied to China, are increasingly hedging against political risk by accumulating alternative assets, particularly gold.
Analysts at JPMorgan said in a March report that they expect central banks to continue buying gold this year, but to be less sensitive to price fluctuations. This suggests that gold prices are likely to remain high throughout 2024.
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