“These are… separate efforts, but they can work together to slowly erode the absolute dominance of the dollar and its payment system,” El-Erian said.
on the bandwagon
It will take a long time to readjust. Developed countries hold 70% of their reserves in gold, while BRICS central banks typically hold about 10% in gold and most of the remainder in dollars. This means they are likely to remain long-term buyers of gold, although they may hold off when they think prices have risen too much, as is currently the case with the People’s Bank of China.
But retail investors around the world, as they often do, are speculating and jumping on the bandwagon.
Traditionally, gold prices have been correlated with central bank interest rates. When yields on savings and bonds rise, as they have since 2022, gold has generally moved in the opposite direction because it has no yield. But I think this time will be different. Gold prices have risen most of the time that central banks have been raising interest rates, and they have risen even faster when the Federal Reserve and the European Central Bank began cutting interest rates.
“Traditionally we wouldn’t have paid any attention to this,” said David Wilson, director of product strategy at French bank BNP Paribas. “But it is clear that the actions of central banks have had an impact on the psyche of speculative investors. “When they see central banks buying gold, they say, ‘We should buy gold too.’”
According to data compiled by the US Commodity Futures Trading Commission, as BNP’s Wilson points out, central banks are controlling the net amount of gold futures held by market participants (which roughly represents investor buying). It said it has more than tripled in the past 12 months. Purchasing has definitely eased this year. Net speculative interest is currently just below record levels at the start of the pandemic.
