Gold Rush: Sanctions Fears Push Investors to Dump Western Holdings
17:26 GMT 11.07.2023 (Updated: 06:50 GMT 29.10.2023)
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Central banks and sovereign wealth funds are continuously retrieving their gold holdings from abroad as a shield against Western nations' sanctions heaped on Russia, a study by a US independent investment management company shows.
Countries are seeking a safeguard for their foreign reserves amid calls for de-dollarization, rising inflation and geopolitical tensions triggered by the impact of sanctions against Russia.
Unparalleled sanctions on Russia and the blocks imposed on its Central Bank reserves, stiffening trade restrictions on China, cutting off Russia's banking system from SWIFT, and President Biden's economic policies, Bidenomics, have reportedly heralded a rethink among concerned governments to de-dollarize.
Consequently, a falling demand for dollars in international trade and settlements has been observed, despite the US confronting substantial budget shortfalls that need funding.
The bearish trend of financial markets of the past year has likewise resulted in considerable losses for governments and fund managers. This has prompted a thorough reassessment of their strategies, as there are strong indications that geopolitical rivalry and soaring inflation will persist for the foreseeable future.
Most of the sovereign wealth funds and central banks that participated in a yearly Invesco Global Sovereign Asset Management Study presume that spiraling inflation will not ease for ten years, surpassing the levels of the previous decade.The study was made among 57 central banks and senior portfolio strategists from 85 sovereign wealth funds.
In the financial system, the favorable investment options will be bonds and gold domiciled in emerging markets. Still, the West's freezing of roughly $640 billion in Russia's reserves last year in reaction to its special military operation in Ukraine has changed the situation.
Demand for 'Western Financial Assets' Sags
Sergio Rossi, professor of macroeconomics and monetary economics at the University of Fribourg, told Sputnik that an increasing number of "institutional investors" now seek to repatriate their gold reserves out of concern in order to avoid a possibility where these assets might be "confiscated as a result of mounting geopolitical tensions."
"The potential risks from such a precedent are indeed twofold: on the one hand, these investors might be impeded to sell part of their gold reserves as the latter may be confiscated; on the other hand, this confiscation can push up the price of gold further, which induces these investors to make sure their gold reserves are repatriated, so that they can have full control on them," he explained.
This "mass withdrawal of gold reserves," Rossi said, essentially means that the decrease in demand for "Western financial assets," due to said assets not being expected to "deliver the promised return on the initial investment."
"Further, the restrictive monetary policy stance of major central banks, particularly the US Federal Reserve and the European Central Bank, is an additional factor of this large switch from Western financial assets to gold reserves, as any further increase in the policy rates of interest makes the Western financial system more and more fragile, particularly because an increasing number of Western banks are recording a mushroom growth of the volume of non-performing loans, as regards small and medium sized firms as well as households," he suggested.
According to Rossi, this negative trend will primarily affect the US regional banks and the European banks, "so much so that another global and systemic financial crisis could burst before long, hitting hard the majority of Western countries."
At the same time, the better perspectives of economic growth and financial stability in the BRICS area – as compared to those in the Western economy – help make the non-Western financial institutions more attractive in light of this situation.
"Also, multilateral trade agreements as well as a multi-currency payments system between the member countries of BRICS provide more possibilities to earn a return on investment over the medium-to-long run, than this is the case in the globalized Western economies," Rossi added. "If so, then an increasing number of investors, both private and institutional, could decide to move part of their gold reserves into some BRICS countries, particularly where these investors might want to invest or to carry out some business activities."
Meanwhile, Chris Devonshire-Ellis, chairman of pan-Asia business management consulting firm Dezan Shira & Associates, argued that countries would likely want to store their assets at their respective homes for the time being, though he did admit that "alternatives may arise" in time.
"It is of note that the BRICS grouping already controls about 60% of global gas reserves and that these, as well as oil reserves, will increase as new proposed members are added," he told Sputnik. "The Shanghai Cooperation Organization (SCO) is probably a candidate to propose strategic regional security in terms of a managed asset depositary."
He also agreed that the move by the US and its allies last year to confiscate Russian assets "without going through international legal protocols" created a precedence "whereby assets can be frozen at any time by Western countries should any future dispute arise that the Western powers take an opposing position to."
"It means that sovereign wealth funds elsewhere have seen a risk increase in holding significant funds in the West, and therefore wish to bring them back to their own jurisdictions," Devonshire-Ellis added.
The Appetite for Gold
A report published in February by the World Gold Council states that central banks worldwide swooped down on a record 1,136 metric tons of gold in 2022; the trend of buying gold has been consistently increasing for the 12th consecutive year.
This set pattern demonstrates a huge number of central banks globally were alarmed. The survey revealed that about 60 percent of the participants agreed with the attractiveness of gold, although 68 percent kept increasing their reserves in their countries, marking an 18 percent rise from 2020.
A Western central bank reportedly told Invesco that they increased their gold reserves almost a decade ago and previously stored their gold reserves in London. "But we've now transferred our gold reserves back to our own country to keep it safe — its role now is to be a safe-haven asset," the central bank was quoted as saying.
To Diversify or Not to Diversify?
Emerging markets offer concerns and opportunities for central banks, prompting them to reduce their reliance on the dollar.
Some experts think that the increasing US debt negatively affects the dollar's value, although many consider it the dominant global currency. The number of people considering the Chinese yuan a likely rival dropped from 29 to 18 percent compared to last year. Out of the 142 institutions surveyed, approximately 80 percent believe that geopolitical instability poses the greatest threat in the coming ten years, while 83 percent were worried about inflation in the following 12 months.
Infrastructure is now seen as the most attractive asset class, particularly those projects involving renewable energy generation.
Renewable energy projects are becoming increasingly desirable in the field of infrastructure investments.
Rod Ringrow, the head of official institutions at Invesco and responsible for the report, believes that wealth funds with good market performance the previous year acknowledged the dangers associated with overpriced assets. They were also willing to make significant changes to their investment portfolios. Ringrow expects this trend to continue as funds and central banks focus on taming rising inflation.
No Consensus on Alternative Reserve Currency
The survey noted that most central banks agree that there is currently no other currency that can replace the US dollar as the main currency held in reserve. It further explained that the Chinese yuan doesn’t seem like a viable alternative in the near future.
Only 18 percent of the respondents believe that the yuan will become a "true reserve currency in five years," a decrease from the 29 percent who shared this viewpoint last year.
"People have been looking for alternatives to the dollar and euro for a long time, and they would've gone to them already if there were any suitable alternatives," an undisclosed central bank in an emerging market revealed to Invesco.
