The World Gold Council recently revealed that global central banks bought up a net total of 651.5 tons of gold in just the past year. This represented the greatest level of yearly net central bank gold buying since the dollar was suspended from conversion into gold back in 1971. It also notched the record for second greatest yearly total ever recorded.
It begs a few questions: who has been buying all of this gold and why suddenly? The answer is not just one central bank or even two. The most aggressive purchasers have been gold buying leader Russia and also China lately. Yet many others have participated from Turkey to Kazakhstan (a huge buyer last year as well), to even EU skeptic central banks in Poland and Hungary.
The truth is that in general, central bank buying of gold has dramatically surged in the past several years. Something is beyond this trend of moving into safe haven metal when the economy is by and large growing around the world. The answer is disturbing for Americans.
These central banks in particular are looking to dramatically reduce their net exposure to American dollars. The Street is one of a number of publications that came to this startling conclusion. They wrote in a recent article:
“Now it seems central bank reserve managers have founded a… fraternity of their own, the ABD club: ‘Anything but (US) dollars…’ A reticence among reserve managers to increase U.S. dollar exposure can be viewed as economically rational. One big beneficiary has been gold.”
It is not hard to understand why nations such as Russia and China want to cut their dollars exposure. The U.S. has been increasingly weaponizing its currency. The country has been able to do that because it owns the main system for allowing monetary transactions (SWIFT) around the world. This is a dollar-based, U.S. banking tied system.
This SWIFT is an acronym for the Society for Worldwide Interbank Financial Telecommunication. It allows financial institutions to receive and send information on financial transactions in a standardized and secure environment. Because the dollar remains the reserve currency of the world, SWIFT uses the international dollar system.
The reason this matters for our discussion here is because this provides the United States with a tremendous amount of leverage versus other nations. The U.S. has happily employed the system as a weapon a lot recently. As relations with Russia deteriorated in 2014 and 2015, America blocked a few Russian banks from access to SWIFT. In the fall America threatened to cut China off from the dollar system if it would not participate in United Nations sanctions against North Korea.
The Street also notes another more recent incident of American bullying using the system, with:
“Volkswagen, Europe’s biggest car maker, has been told to close its business in Iran due to U.S. sanctions if it wants to continue doing business in the U.S. or accessing U.S. financial markets. Volkswagen felt compelled to comply despite this being at odds with the view of the German government and the broader European Union.”
The Street and other publications have also pointed out about that because of the reserve currency status of the dollar America has the “exorbitant privilege” of receiving a consistent ongoing demand for the currency. Because of this fact, the U.S. is able to inexpensively finance its enormous spending on world markets.
Yet the dollar’ share of global trade is decreasing. Today it is utilized in around 40 percent of all SWIFT transactions, as this chart below shows:
This is slightly down from its 2014 peak. It is a warning alarm for sure.
Is Your Retirement Portfolio Protected from the Decline of the U.S. Dollar As Dominant Reserve Currency?
There are now several major efforts to get around the dollar currency system. Russia’s SWIFT alternative payment system the SPFS (System for Transfer of Financial Messages) is already more popular in Russia than its globally dominant rival. Back in September (2018), the EU unveiled plans to develop its own special payment system to get around U.S. economic sanctions against Iran. In this time frame, the Russians have managed to reduce their dollar reserves from 46 percent total reserves down to 22 percent.
Meanwhile gold demand has grown an average of five percent a year over the last decade. The yellow metal is where savvy investors and smart money take shelter from financial storms. It dominates the safe haven category with literally thousands of years in proven track record. Having gold in your IRA will provide you with the peace of mind you need to rest easy.
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