Central banks are increasingly adding gold to their reserves in response to growing concerns about the strength of the US dollar. The World Gold Council (WGC) has reported that 228.4 tonnes of gold were added to global reserves in Q1 2023, led by central banks in Singapore, China, Turkey, and India. This is a 176% increase compared to the previous year and marks a record high for Q1. The WGC also predicts that the trend is likely to continue. Central banks are seen as turning to gold as a way to de-dollarize, given the US dollar's role as the traditional mainstay of such reserves.
One of the reasons cited for the move is the use of the dollar as a weapon to put financial pressure on Russia following its war on Ukraine. This has led to gold being seen as a vehicle of central bank revolt against the dollar, according to Ruchir Sharma, Chair of Rockefeller International. Meanwhile, the price of gold has been closing in on a fresh record high, reflecting significant investor interest in the precious metal as a safe haven.
The rise in demand for gold is seen as a bet against the Federal Reserve's ability to control high inflation and its aggressive interest rate hikes, which have created turbulence in the banking sector and raised the potential for a credit crunch. The WGC notes that there is little indication that the trend towards purchasing gold will change in the short term, and that buying is likely to continue to outweigh selling in Q2.
Overall, the surge in gold buying by central banks highlights the growing need to hedge against the risks associated with the US dollar, and suggests that gold may be playing an increasingly important role in the global economy.
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