Has central bank buying of gold been part of a transition from dollars to RMB for FX reserves manage

Central banks have been a key driver of rise in the gold price this year. In the first half of 2019 central banks bought 374 tonnes of gold, which was almost 20% of global gold demand, and was 57% up on the first half of 2018. And it’s not as if they sat on their hands in 2018, as purchases for the FY2018 were larger than for any year since the collapse of Bretton Woods.

A new paper published by Omfif (and sponsored by the World Gold Council, it must be flagged) highlights that the major gold buying nations are well integrated into China’s nascent institutional architecture. Consider that 64% of recent gold buying nations have RMB currency swap lines, 69% are signatures to the Belt and Road Initiative, and 72% are members of the AIIB.

What’s the link? The theory suggested is that the buying of gold might be a transition purchase before a move into RMB, a move that can’t yet be undertaken because RMB capital markets are relatively illiquid, immature, and inaccessible.

In support of this theory I would agree that;

there is a clear anti-US dollar vote in a growing number of nations. Just look at the list of major gold buyers which is led by Russia, Turkey, various ex-CIS states, and China itself. The weaponisation of the US dollar by the US Treasury (which began with the BNP Paribas fine in 2014) has been key.

Some of China’s most important neighbours and trading partners are also on the list of major gold buyers (South Korea, Thailand, and the Philippines).

Whilst around 60 central banks now have RMB in their FX reserves, total exposure to RMB is very small at around 2% of global reserves according to the IMF. There is a large mismatch between the weight of China in the world economy, and the weight of RMB in global FX reserves (the opposite of the situation for the US economy and the US dollar). Some degree of recalibration is likely over time.

The conclusion in the paper is that although the world’s central banks have a desire for a more diverse holding of reserve currencies, fiat currency rivals to the dollar all face drawbacks. The world can’t wait for euro bond yields to go positive, or for the RMB markets to show more maturity. The argument is that If the switch away from US dollars has to take place now, then it needs to be into gold. Interesting. Find the paper at

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