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De-dollarization train is moving at full speed and gold is the first to react

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(Kitco News) The U.S. dollar's dominance is being challenged on several fronts simultaneously — from countries choosing to conduct trade in local currencies to BRICS developing its own currency. And gold is paying attention.

China and Russia, in particular, stepped up their efforts to ditch the U.S. dollar. Russia has been moving away from the greenback for some time, but efforts accelerated after Western sanctions were introduced following the invasion of Ukraine.

Russian President Vladimir Putin said he supports using the Chinese yuan for trade settlements between Russia, Asia, Africa, and Latin America.

The yuan is already the most traded currency in Russia, according to data compiled by Bloomberg. This happened only in February after the yuan surpassed the dollar in monthly trading volume for the first time.

This was topped by Russia's State Duma Deputy Chairman Alexander Babakov confirming that BRICS — Brazil, Russia, India, China and South Africa — are working on creating their own common currency. Babakov suggested that the new currency could be backed by a basket of commodities, including gold and other rare-earth elements.

Last week, Former Goldman Sachs chief economist Jim O'Neill called on the BRICS bloc to expand and challenge the dominance of the U.S. dollar.

O'Neill argued that the dollar's dominance destabilizes other nations' monetary policies, which is why BRICS should counter it.

"The U.S. dollar plays a far too dominant role in global finance," he wrote in a paper published in the Global Policy journal. "Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the value of the dollar and the knock-on effects have been dramatic."

Former President Donald Trump commented on the global de-dollarization trend when speaking to his supporters Tuesday. The U.S. dollar "is crashing and will no longer be the world standard, which will be our greatest defeat, frankly, in 200 years," Trump said after pleading not guilty in a Manhattan court to 34 felony counts of falsifying business records.

In recent developments, Saudi Arabia has approved joining a China-led Shanghai Cooperation Organization (SCO) as a dialogue partner. The SCO is a political, security and trade alliance created in 2001 to counter Western influence. Its members include China, Russia, India, Pakistan, and four central Asian countries.

Another historic move by China was the completion of the first yuan-settled LNG trade, which was done between the Chinese national oil company and France's TotalEnergies through the Shanghai Petroleum and Natural Gas Exchange.

In response to higher demand for the yuan, Chicago's CME Group opened options trading for Chinese yuan futures this week. "Many traders no longer view CNH as an emerging market currency like it was ten years ago," said Chris Povey, CME Group's executive director of FX products.

This week, China and Malaysia announced that they were open to discussing the creation of an Asian Monetary Fund to reduce reliance on the U.S. dollar. Malaysia's central bank is also working on a trade settlement mechanism in local currencies.

India and Malaysia announced over the weekend that they abandoned trading in U.S. dollars and can now settle in Indian Rupees. India also said it would offer up its currency as an alternative to U.S. dollars for countries struggling with USD shortages.

Gold is paying attention

This de-dollarization trend can directly impact the gold market, especially regarding sentiment, said Gainesville Coins precious metals expert Everett Millman.

"There is definitely a lot of discourse about the dollar losing its reserve currency status. Where that conversation goes is going to be very important for gold," Millman told Kitco News. "The idea that the dollar is going to imminently collapse is very overhyped. But it affects people's perception and sentiment in the gold market. When you look at shorts versus longs in old futures, sentiment is still fairly neutral."

If there is a swing in the public perception of what's happening with the dollar and the U.S. economy, that will shift sentiment very quickly, and gold is usually the first asset to react to that, he added.

Wednesday, the gold market continued to trade solidly above $2,000 an ounce, with June Comex gold futures last at $2,039.20, flat on the day.

After buying a record amount of gold in 2022, central banks are not letting up, with 2023 seeing the strongest start to the year in more than a decade, according to the World Gold Council (WGC).

Global gold reserves increased by 52 tonnes in February, rising for the 11th month in a row, the WGC said Tuesday. In January, central banks bought 74 tonnes of gold.

Year-to-date, central banks' net purchases stand at 125 tonnes. "This is the strongest start to a year back to at least 2010 – when central banks became net buyers on an annual basis," said WGC's senior analyst Krishan Gopaul.

The biggest purchaser in February was the People's Bank of China, with 25 tonnes bought. This was the fourth monthly increase for China, during which the PBOC added 102 tonnes of gold.

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