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A weaponized U.S. dollar could prompt central banks to diversify with more gold - MKS' Shiels
(Kitco News) - A weaponized U.S. dollar as Russia's war with Ukraine enters its fifth week could create more opportunities for gold, according to one precious metals firm.
In reports published Wednesday and Thursday, Nicky Shiels, head of metals strategy at MKS PAMP Group, highlighted the impact that ongoing Western sanctions imposed on Russia could have on the global economy and how it could impact the dollar's role as a reserve currency.
"Depending on whether the West is successful or not, the more they are used or, the longer sanctions are imposed, the more other countries will try to avoid relying on Western finance," she said in the report.
Looking at the U.S. dollar's role within the global economy, Shiels said that it remains the largest currency held by central banks, representing about 60% of global reserves. She also noted 90% of daily trades in the $6.6 trillion foreign exchange market involve the U.S. dollar.
"There are current alternatives, but none currently match the US$ in size, depth and respect," she said. Although the gold market is still too small to completely replace the dollar, Shiels said central banks can still use it to diversify away from the U.S. dollar.
Shiels noted that in a vote held by the U.N. General Assembly demanding that Russia stop its invasion of Ukraine, 35 countries abstained from voting and five nations voted against the resolution.
She added that these 40 nations own a combined total of 193 million ounces of gold. That gold, "can be monetized and sold off-market (bearish) or ramped up in order to further de-dollarize (bullish) in an effort to reduce reliance on the US$ and thus the Western banking system," she said.
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"If those countries deemed Russian friends were to alter their gold reserves and bring them in line with the current threshold of 17%, collectively they would need to buy an additional ~290mn oz of Gold," she added an updated note Thursday. "That's a whopping 2.6x the size of all ETF holdings. Specifically, China would need to buy ~260mn oz, given the size of its reserves, India +33mn oz and Bangladesh would need to buy 3.9mn oz."
While the U.S. dollar is not expected to lose its reserve status anytime soon, Shiels noted that superpowers weren't built in a day.
At the same time, Shiels said that gold also faces some headwinds as nations and consumers deal with rising inflation.
"Typically, food crises and the associated surging inflation is bullish gold, from an investment standpoint, but only to a point. If it severely impacts discretionary income from poorer gold consuming nations, not only is consumer demand crimped, but gold holdings/savings could potentially be unlocked," she said.
