Central banks are preparing for a new monetary regime with gold playing a key role, says Goehring & Rozencwajg
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(Kitco News) Emerging central banks are gearing up for a new monetary regime in which gold will play a vital role as a settlement mechanism, according to Goehring & Rozencwajg.
"The U.S. dollar might be on the verge of losing its reserve currency status," Goehring & Rozencwajg managing partner Leigh Goehring told Kitco News. "A change in the dollar's reserve currency status would be the most impactful market shock of the last forty years."
Recently central banks have stepped up gold allocation, boosting their reserves, led by emerging economies such as China, India, Turkey, Egypt, Qatar, and Singapore. After last year's record amount of 1,136 tonnes purchased, central banks added 228 tonnes to their global gold reserves during the first quarter of 2023.
This aggressive gold buying is keeping gold supported above the $1,900 an ounce level in the face of a hawkish Federal Reserve, Goehring said.
"We will break through the triple top that we put in place at the $2,000 an ounce level," he said. "We will blow through it, and the central bank buying will be the big push."
Central banks have not only been a massive source of demand in the last two years, but they are also the driving force for this whole decade.
And this could be connected to a monetary regime change Goehring & Rozencwajg is forecasting. "The monetary regime changes in 1930, 1968, and 1998 were hugely stimulative for commodity prices, and we believe the monetary regime change that will take place this decade will be no different," Goehring said.
The idea that the U.S. dollar is losing its reserve currency status has existed for years. But it has been nothing but noise. So what makes this time different?
There is a growing amount of evidence of countries moving away from the greenback, including Saudi Arabia talking about settling their oil in renminbi, all sanctioned Russian oil sales being paid in renminbi, Brazil wanting to settle its agriculture trade with China in renminbi, and France's TotalEnergies willing to sell their LNG to China and accept renminbi.
But these efforts cannot be classified as a monetary regime change because China's got a closed capital account, and the countries trading in renminbi cannot exchange it, Goehring pointed out.
This is where gold comes in. "How in the world would you ever be able to exchange renminbi? They're talking about eventually settling it all up with gold," Goehring said. "Any move by China to displace the U.S. dollar as a reserve currency must include some degree of gold convertibility. Foreign holders could then convert some portion of their trade surplus from renminbi into gold via the Shanghai gold exchange."
This could be why all these central banks are buying gold. For example, China has gotten serious about increasing its gold reserves, buying gold for the seventh consecutive month in May. Since November, China has purchased 144 tonnes of gold, with the central bank's total stockpiles now at about 2,092 tonnes.
"Are we trying to set up this system by being able to trade in commodities outside the dollar? And if we get a capital imbalance — we got too much renminbi, or we need more renminbi — we can now settle it on gold," Goehring said. "Are we exploring this idea of trying to undermine the dollar reserve status and settle things in local currencies and be able to eventually take out capital imbalances through gold? It's an interesting idea."
Goehring & Rozencwajg is bullish on gold for the rest of this year, projecting a break through $2,100.