The persistent global build-up of dollar reserves by central banks in the face of ongoing United States foreign trade deficits is likely to boost the demand for gold, says Absa chief economist Christo Luüs.
“As dollar reserves keep rising, central banks are becoming exposed to the danger that, at some stage in the future they will not be able to mobilise these dollar reserves if they decide to do so.”
The international economy is experiencing an avalanche of dollar liquidity, which is likely to prompt most central banks to contemplate diversification into gold as a viable option.
Luüs says Asian central banks, whose foreign-reserves portfolio constitutes miniscule gold holdings, are the ones most likely to diversify extensively into the yellow metal.
“The rise in the dollar assets of many central banks means that the proportion of foreign reserves held in gold has now reached derisory levels in the case of many such institutions. Both the Chinese and Indian central banks are reported to have a paltry 1% of their foreign reserves in gold, yet they are among the biggest holders of such reserves in the world.
“For some time, central banks, and especially Asian central banks, have constituted a potential meaningful source of gold demand. A policy of nibbling in the gold market could be on hand.”
Eight of the world’s biggest foreign reserves holders are from Asia. Known as the “Group of Eight”, the countries are Japan, China, India, South Korea, Taiwan, Hong Kong, Singapore and Malaysia. In the past five years these countries have more than doubled their collective official holdings of foreign securities to about $2,5-trillion.