With increased fears of a looming recession, economic sanctions and ongoing trade tensions both Russia and China are adding to their gold reserves. The price of gold has risen by 18% since January 1st 2019 and is now at a six-year high.
The World Gold Council found that central banks bought a record 374 tonnes of gold in the first half of this year. Both central banks and private investors have turned to the precious metal as a reliable defensive hedge against any upcoming economic uncertainty. However, Russia and China are also motivated by long term geopolitical concerns.
Bloomberg reported at the beginning of this week that the People’s Bank of China has added over 94 tonnes of gold to its reserves since December, a 4.95% increase.
The Russian Federation has likewise maintained its long term policy of building up gold reserves. The yellow metal now constitutes the largest share of Russia’s total reserves since 2000. Russia’s gold has risen in value by 42% in the past year alone, rising to $109.5bn.
Both nations are diversifying their reserves in order to distance themselves from the U.S. dollar (USD). An international financial system less dominated by the United States will result in a shift of geopolitical power to Eurasia.
Last year the Central Bank of Russia moved $100bn of U.S. holdings into euros (EUR), yen (JPY) and yuan (CNY), purchasing a quarter of the worlds yuan reserves. The Russian government is so pro-gold that it recently eliminated the 20% VAT on investments in the yellow metal.
At a conference alongside Chinese Premier Xi Jinping, Russian President Vladimir Putin criticised the continued status of the U.S. dollar as the global reserve currency accusing Washington of seeking to “extend its jurisdiction to the whole world,” adding that “it does not serve the interests of the future.”
China still possesses the largest foreign exchange reserves in the world, with the latest figures standing at $3.1072tn USD. In August the Yuan fell 3.8% against the dollar, the steepest monthly drop since 1994, it is currently trading at an 11 year low.
It has increasingly turned to gold to sure up its long term economic stability and distance itself from the United States at a time of trade tensions and yield curve inversions. In June this year it ended its run as the world’s largest owner of American debt, giving way to Japan.
As painful as this may sound to gold bulls, it seems the time to start trading gold from the short side might finally be upon us as the U.S.-China trade talks seem to be sinking in.
Analysts at Citigroup would disagree with this analysis having recently published a report that highlighted the possibility of gold hitting a record high of $2,000 an ounce within the next two years.
Even if Sino-American trade relations do improve, with U.S. economic growth fading and interests rates being cut yet further, the de-dollarisation of the global economy looks set to continue.
Presidents Xi and Putin could find an unlikely ally in the Governer of the Bank of England, Mark Carney, who envisioned last month a new digital currency backed by a large group of nations to “dampen the domineering influence of the U.S. dollar on global trade.”