The share of the US dollar in global foreign exchange reserves has significantly declined since it surpassed 70% at the beginning of this century. Currently, the dollar's share in the foreign exchange reserves held by central banks and governments around the world is at a historic low.
Russia's invasion of Ukraine triggered severe sanctions from the United States, which led to Moscow being excluded from the dollar-based global financial system. This move has prompted emerging economies to increase their gold reserves, which are not tied to any specific country.
Foreign exchange reserves are assets held by central banks to handle emergencies, repay foreign debt, and pay for imports. They are also an important source of funds for currency market interventions. These reserve assets are usually denominated in dollars and commonly take the form of easily convertible US Treasury bonds.
According to data from the International Monetary Fund (IMF), as of March 2024, the total global foreign exchange reserves amounted to 12.3499 trillion US dollars, with the dollar accounting for 58.9%. This proportion has slightly increased by 0.4% from the end of 2023 but remains close to a historic low. In contrast, at the beginning of the 21st century, the dollar's share exceeded 70%.
In response to the Russia-Ukraine conflict, the United States, Europe, and Japan have sought to exclude Russia from the dollar settlement network and froze the foreign exchange reserves that the Russian central bank had deposited with other central banks.
Karakama Daisuke, Chief Market Economist at Mizuho Bank, stated that this measure has prompted countries worldwide to begin gradually shifting their foreign exchange reserves from the dollar to other assets, possibly favoring the yen among others.
As central banks continue to push for diversification of their reserves, the amount of gold purchases has significantly increased. Due to its rarity and independence from the credit risk of any specific country or corporation, gold is highly favored.
In 2023, the net purchases of gold by global central banks reached approximately 1,030 tons, marking the second consecutive year with net purchases exceeding 1,000 tons. The net purchases set a record of 1,082 tons in 2022.
According to statistics from the World Gold Council (WGC), in the second quarter of 2024, the net purchases of gold by global central banks were about 183 tons, an increase of 6% year-on-year.
In the first half of this year, the additional gold purchases by global central banks reached 483 tons, setting another record high and increasing by 5% year-on-year.
Economists point out that the weakening confidence in dollar assets, increased volatility in the foreign exchange market, high US interest rates, and the desire of many central banks to diversify their reserve assets make investing in gold highly significant.
In its July report, the People's Bank of China stated that as of the end of June, China's gold reserves stood at approximately 2,264 tons, maintaining this level for two consecutive months. This stability is closely related to the high international gold prices. Since November 2022, the People's Bank of China has increased its gold reserves for 18 consecutive months, with a cumulative increase of 16.3%.
Meanwhile, the Central Bank of Brazil announced that as of the end of 2023, its gold reserves accounted for 2.6%, an increase of 0.08 percentage points from the previous year.
India's gold reserves have also been significantly increasing. As of the end of July, India's gold reserves were valued at 57.6 billion US dollars, an increase of 30% year-on-year. Additionally, countries such as Singapore, the Philippines, and others have been actively increasing their gold holdings.
Indian economists say that the motivations driving gold purchases are both political and economic: "Especially as the 'reliability' of the dollar is 'waning' and confidence in dollar assets is 'significantly declining'."
Against this backdrop, the Russia-Ukraine war and ongoing turmoil in the Middle East remain concerning, and another potential geopolitical risk is approaching—the return of Trump. If Trump is re-elected in the November election, the confrontation between the US and China could further intensify, exacerbating the anxiety of emerging economies about holding dollars.
