Central Banks around the world are accelerating their 'de-dollarization' efforts. As they embark on a historic gold hoarding spree, cracks are emerging in the dominance of the U.S. dollar.
According to international financial markets on the 27th (local time), the spot price of gold set a record of $3,500.05 per ounce on the 22nd. Since then, it has stabilized around the $3,400 mark as of that day. According to Reuters, gold prices have surged 31% in four months this year.
The key reason for the rising gold prices is the Central Banks. According to the World Gold Council (WGC), Central Banks collectively purchased nearly 710 tons of gold in the first quarter of this year, potentially breaking the record for maximum purchases in a single quarter.
Central Banks also purchased 54% more gold in the 4th quarter of last year (333 tons) compared to the same period in the previous year.
Gold is a representative safe asset that divides the international financial market with the U.S. dollar.
As geopolitical tensions, aggressive tariff regulations from the Trump administration in the U.S., and the potential for recession coincide, Central Banks are competitively securing alternative assets such as gold and the Chinese yuan instead of dollars.
As a result, the status of the dollar is noticeably shaking. Looking at the dollar index (DXY), which reflects the value of the dollar against the currencies of six major countries, the DXY rose to 102 in 2019 but fell to around 91 by the end of 2024. This year, it has been hovering around the 92 mark without much strength.
Bloomberg reported, citing experts, that 'after the outbreak of the Russia-Ukraine war and the U.S. froze Russian overseas assets, Central Banks recognized the 'dollar risk' that assets integrated into the dollar system could be frozen at any time as needed by the U.S. government.'
Major countries have already taken concrete actions for de-dollarization. In 2023, China and Saudi Arabia signed a currency swap agreement amounting to 50 billion yuan (about 9.5 trillion won). The two countries are already increasing the use of yuan in oil transactions.
Brazil, regarded as a representative country of the BRICS, has also established a yuan clearing system with China. According to Bloomberg, the two countries are increasing the proportion of direct payments in yuan and the Brazilian real instead of dollars in their annual trade worth $150 billion (about 210 trillion won).
The Russian Central Bank, another pillar of BRICS, has formalized plans to reduce the share of dollars and euros in its foreign exchange reserves, while increasing the combined share of yuan and gold to over 70%.
Countries belonging to the Global South, which refers to developing countries in the Southern Hemisphere, adopted an official goal to promote the use of local currencies in trade payments among member countries at the Johannesburg summit in South Africa last year. Reuters reported that they are considering specific measures, such as establishing a joint payment system excluding the dollar and issuing their own digital currencies.
Global investment banks are weighing the deepening weakness of the dollar and further increases in gold prices for the time being.
JP Morgan projected that if the trend of gold purchases by Central Banks continues as it is, gold prices could surpass $4,000 per ounce, a 15% increase compared to now, in the second quarter of next year.
Goldman Sachs also set a year-end gold price target of $3,700 due to the weak dollar and accelerating de-dollarization.
Reuters, quoting experts, reported that 'the deepening U.S.-China power competition, unpredictable policies from the Trump administration, and possible pressure from the Federal Reserve Board (FRB) are undermining trust in the dollar.' It noted that 'as expectations for interest rate cuts in the U.S. grow, the opportunity cost of holding gold, which does not earn interest, has decreased, thereby enhancing gold's appeal.'