Seeking Alpha
Growth at reasonable price, long/short equity, foreign companies, master limited partnerships
Profile| Send Message|
( followers)  

Summary

  • There have been several geopolitical events that have occurred recently that show an increasing distrust in the U.S. dollar by foreigners.
  • Foreign central banks have been decreasing their holdings of U.S. Treasuries (see Part 1).
  • In addition to buying eurozone assets, the central banks of some nations have been purchasing gold.
  • Public and private buyers in China purchased over 50% of the world's annual production of gold last year.
  • If Russia ramps up its gold purchases in response to the sanctions, that could also represent a large portion of the world's production.

Click here to read Part 1.

Click here to read Part 3.

Another asset that foreign central banks have been purchasing is gold. On March 25, the Central Bank of Iraq, one of the major oil exporting nations of the world, said that it bought 36 tons of gold in March as part of its effort to stabilize the Iraqi dinar against other currencies. This single purchase more than doubled Iraq's holdings of physical gold. In fact, the country's purchases of gold in March were greater than the entire gold demand of France, Taiwan, South Korea, Malaysia, Singapore, Italy, Japan, the UK, Brazil, and Mexico in 2013.

Source: GFMS via Thomson Reuters

Iraq is an oil rich nation in the Middle East where rulers are more or less very friendly to the petrodollar standard (except in Iran) that has resulted in the U.S. dollar being the reserve currency. I discussed the importance of the petrodollar standard in maintaining the U.S. dollar's strength in Part 3, which is linked to above. So, if a nation that is relatively friendly to the petrodollar standard such as Iraq is buying gold, what about an oil-exporting nation that is unfriendly towards it such as Russia?

Well, Russia has also been buying gold. In February, Russia purchased 7.247 tons of gold according to Goldcore. This purchased increased the nation's gold reserves to 1,040 tons. According to the same article, Turkey and Kazakhstan also increased their gold reserves in February, with Turkey alone purchasing 9.292 tons. All of this gold being purchased by these nations has to come from somewhere, and this somewhere is by and large the nations of the West. But let's go back and focus on Russia for a moment. This is one of the largest oil exporting nations of the world and it has been showing a marked appetite for gold, which has apparently increased due to the events going on in the Ukraine. Russia has approximately $400 billion in foreign exchange reserves. While it is exceedingly unlikely that the country will spend all of this money to buy more gold, as Goldcore points out, just 5% of this would buy about 500 tons of gold. This is roughly 25% of the world's total annual production. Such a move would almost certainly drive gold prices higher as it would represent a significant source of new demand.

Then there is China. China is the world's most populous nation and, as gold bugs have long suspected, the largest buyer of gold. As I noted in my last article (linked above), China's official gold reserves have been static for years. However, as Reuters points out in the chart above, the country imported 1,158.16 tons of gold from Hong Kong alone in 2013, or more than 50% of the world's total annual production. This was more than double the country's imports of gold in 2012. So far in 2014, net gold exports to China from Hong Kong were 89.75 tons in January and 112.31 tons in February. Please note that these figures do not include gold imports from any locations other than Hong Kong. In addition, we are not certain how many of these gold purchases were by private sector buyers compared to the People's Bank of China. It is reasonable to assume that at least some of this gold was purchased by the Chinese central bank. But even if all of this gold were purchased by private buyers, it still shows that the Chinese people as a whole are distrustful of and are getting more distrustful of the U.S. dollar and other paper currencies.

Source: Several Geopolitical Events That Could Prove Negative For The Dollar And Bullish For Gold - Part 2