Commodities | Sep 02 2011
By Greg Peel
No one wants the US dollar to cease being the world's reserve currency – at least not just yet. As much as the world would perhaps like to thumb its nose at the US and dump on a dollar being constantly debased by the Fed, the problem is all those dollars are owned by the world, and owed to the world. A US dollar sell-off would be a case of mutually assured destruction.
The rest of the world must also take some blame of course, for lending all that money to the profligate Americans in the first place. There's little point in whinging. All one can hope to do is quietly extricate oneself from a dangerous position without awakening the sleeping hounds. This means gradual diversification of foreign reserves.
But into what? The euro? The way things are going, the euro may not even be with us for much longer. The yen? Japan has proportionately more debt than the US and a greater propensity for currency intervention. Speaking of intervention, that counts out the Swiss franc as well. The pound? No, those days were a couple of centuries ago. The yuan? That's pegged to the US dollar. How about the Aussie? Nice idea, but not enough of them.
There is only one “currency” that cannot be destroyed by man.
Most of the world's gold held by central banks is held by those in the US and in Europe (as well as with the IMF). America scored most of its gold post-WWII while European gold represents a few thousand years of history. In 1998, Britain sold half of its gold reserves at about US$250/oz. Australia did too. As for the rest of the world, proportionately very little gold is held by central banks elsewhere, and certainly very little by those of emerging economies. In the early noughties, gold was pretty much considered a defunct currency.
In the period 1999-2009, European central banks sold 450 tonnes of gold. In 2010, no central bank sold gold. In 2011, the rush has been on to buy.
China has become the world's largest gold producer since the GFC and a lot of that has made its way recently into the vaults of the PoBC. Since 2007, China has increased its central bank gold holdings by 400t. India has chimed 200t.
Russia has been a keen buyer of gold of late and is now the eighth largest holder of bullion, with 4.4t of purchases in July taking 2011 purchases to 51t, according to the IMF. Russia's bullion holdings have doubled to 400t in the past four years. Mexico has bought 100t in 2011, Thailand 28t and South Korea 21t.
The US dollar index has fallen around 6% this year but gold has risen around 30%. This might cause some to assume gold is overvalued. And indeed, many believe gold needs to fall back further from here to re-establish a healthy bull trend. But others will tell you quite simply it is the US dollar which is overvalued, and thus it has further to fall. In the 1970s the US economy replaced gold as the world's measure of wealth. To most that now looks, in retrospect, like it was not such a good idea.
