This report takes stock of recent developments in official sector gold demand and examines the state of the international reserve currency system.
Gold has experienced a resurgence as a reserve asset – central banks have become net buyers over the past 10 years, and their holdings have reached levels not seen since the 20th century. This has several origins, among them growing geopolitical tension between regional blocs; the swelling share of negative-yielding fixed income securities; and the emergence of possible challenger currencies to ‘king dollar’, which holds a more than 60% share in global foreign exchange holdings.
This report considers how the potential rise of the renminbi may factor into gold’s renewed popularity. Chinese authorities, keen to internationalise the currency to limit their reliance on the dollar, have taken steps to encourage greater use of the renminbi in cross-border transactions. This report appraises these measures and then considers which factors have traditionally influenced the uptake of a reserve currency, including trade relationships, foreign direct investment and currency movements. It then examines international usage of the renminbi, uncovering a decidedly mixed picture for the Chinese currency.
Most importantly, this report looks at China’s nascent, parallel institutional architecture, which consists of institutions like the Asian Infrastructure Investment Bank and the Belt and Road initiative, and concludes that membership of these bodies has a distinct effect on gold demand. This finding suggests that membership of China-led multilateral initiatives may continue to influence gold purchases, as countries indicate a willingness to diversify and regionalise their reserves through participation in these networks. While gold’s future prominence depends on several factors, including geopolitical developments and trends in Chinese securities markets, this report suggests it will play an important role as the international monetary system becomes more fractured in the long term.