(Kitco News) – While the weaponization of the dollar is a major issue, U.S. fiscal deficits and the greenback’s weakness down the road are also driving the world’s central banks to accumulate gold, according to Bloomberg macro strategist Simon White.
“Powell might not be overly worried about inflation - with his recent comments reiterating the Federal Reserve is on track to cut rates this year - but other central banks are not so relaxed,” White wrote. “Gold’s new high signals global central banks are likely accumulating the precious metal in an effort to diversify away from the dollar, as persistently large fiscal deficits threaten to further erode its real value and lead to more inflation.”
White said that gold’s sharp rally over the last few days “has been broad as well as pronounced (as well as hinted at by low gold vol)” with the yellow metal setting “50-year highs versus three-quarters of major DM and EM currencies.” He noted that after jewelry, the largest gold holdings are in private investment, including ETFs, bars and coins, followed by central bank reserves.
“In recent years the swing buyers have been ETFs, which hold about 2,500 tonnes of gold,” White said. “But ETF holdings have been falling even as the dollar price of gold has been rising.”
He pointed out that this has occurred even as the U.S. dollar has been stable and real yields have risen over the last three months, and the seasonal buying season in China and India is also over. “Further, silver has not participated in the rise,” he said. “It’s therefore a reasonable supposition the official sector, i.e. central banks, has been a significant driver of gold’s recent ascent to new highs.”
White noted that global central banks were adding to their gold holdings in the runup to the pandemic, and again following Russia’s invasion of Ukraine, “even as ETF investors (perhaps dazzled by the bright lights of crypto) have reduced theirs.”
China, Germany and Turkey have been the biggest sovereign buyers of gold over the past six months, he said, adding that China’s increases are likely far larger than the official numbers.
“Central banks want gold as it is a hard asset, not part of the financialized system when owned outright,” White wrote. “But the dominant reason is a desire to diversify away from the dollar. If you’re not on friendly terms with the US, then it is a way to avoid your reserve assets being seized, as happened to Russia.”
But the Bloomberg strategist also proposed another possible reason for the buying spree: “central banks everywhere are quite possibly uneasy about owning too many dollars when the US is running large, inflation-causing fiscal deficits,” he said. “The dollar is structurally overvalued on a purchasing-power-parity basis versus the main DM currencies.”
White shared a chart that suggests the dollar could see significant underperformance in the years ahead.
“Investors in gold ETFs may not see much risk from inflation and to the dollar,” White concluded, “but central bankers are signaling very much the opposite.”
