Central banks worldwide may continue their trend of purchasing gold in the upcoming months. This inclination could be bolstered by the recent downgrade of the US by Fitch Ratings, potentially accelerating the de-dollarisation process. The proportion of US dollar reserves held by central banks as part of their reserves has dropped to 58%, the lowest level in a quarter-century.
An analysis from the International Monetary Fund (IMF) suggests that this decline partly reflects the diminishing role of the US dollar on the global stage, facing competition from other currencies used by central banks for international transactions.
While the US dollar maintains its dominance in foreign exchange reserves globally, indications of divergence and a shift away from the dollar are becoming apparent, as stated by JP Morgan analysts in June.
Recent data from the World Gold Council (WGC) reveals that central banks resumed their gold purchasing activities in June, increasing their holdings by 55 metric tons after three months of sales.
Among these purchasers, the People’s Bank of China, the Chinese central bank, led the pack by adding 21 tonnes to its gold reserves in June. This marked the eighth consecutive month of such acquisitions. Since the Chinese central bank started reporting increases in November 2022, its gold reserves have grown by 165 tonnes, an 8% increase. Notably, 103 tonnes were acquired in 2023 alone, making it the largest buyer this year so far. India is also prominently featured among the leading gold buyers.
Other notable gold buyers include Poland, Uzbekistan, the Czech Republic, and Qatar.
In fiscal 2023, the Reserve Bank of India’s (RBI) gold reserves reached 794.64 metric tonnes, a nearly 5% rise compared to fiscal 2022, during which it held 760.42 metric tonnes.
India’s gold reserves, which were under 600 tonnes a decade ago, have surged to about 795 tonnes.
In 2022, central banks’ net purchases of gold amounted to 1135 tonnes, the highest figure since 1967.
The IMF predicts that the US dollar’s share of global reserves will continue to decline as central banks from emerging markets and developing economies aim to diversify the composition of their currency reserves.
An economist from a leading Indian bank emphasized that the process of de-dollarisation is gradual, necessitating time. However, emerging geopolitical and geo-economic risks have underscored the importance of countries diversifying their forex reserves to mitigate risks.
The BRICS nations (Brazil, Russia, India, China, South Africa) have indicated their intention to explore the possibility of adopting a common currency. Moreover, countries like India and China have been advancing their international trade using their own currencies.
Fitch’s decision to downgrade the US government could further stress the US dollar. Previously, the threat of a US default significantly impacted the global economy and eroded the dollar’s reputation. The Council on Foreign Relations reported that the US government has maintained an average annual deficit of nearly $1 trillion since 2001. Fitch attributed the recent downgrade from AAA to AA+ to a “steady deterioration in standards of governance.”
Fitch also noted that the downgrade wasn’t solely prompted by the most recent debt ceiling impasse; it reflected a gradual decline in governance standards over the past two decades, particularly concerning fiscal and debt-related matters.
