Nikkei Asian Review: Emerging Countries Snap up Gold to Cut Dollar Dependence

Article by Rurika Imahashi on Nikkei Asian Review

TOKYO -- Emerging countries in Asia and authoritarian governments that are at loggerheads with the U.S. are stocking up on gold to reduce their dependence on the dollar.

These countries are hoping to hedge against risks related to the prospect of U.S. President Donald Trump taking an even more hard-line diplomatic posture in the run up to U.S. midterm elections in November.

Gold is a "stateless currency" that can be converted into the monetary unit of any country and is a highly liquid asset.

Many countries are selling their dollars for gold to reduce their vulnerability to Trump's unpredictable diplomatic actions.

In Asia, Southeast and Central Asian nations have been especially keen to ramp up their gold holdings. The Philippines had 196.4 tons of gold at the end of June, up 20% from 2010. Indonesia's overall gold holdings increased 10% during the period to 80.6 tons.

Since the Asian currency crisis in 1997, many Asian countries have been making steady efforts to slash the greenback's share in their financial assets. Gold has been one of the non-dollar assets they have built up in the process.

Itsuo Toshima, a market analyst, points to growing international concerns about the possible consequences of Trump's tax cuts. "Currently, the U.S. economy is in very good shape because of the positive effects of the tax cuts, but the time will come when the U.S. will face negative consequences of the measure," Toshima predicted. "The U.S. government may be forced to increase debt issuance due to deteriorating fiscal health, and that will raise concerns about a bad rise in interest rates and the risk of damaged confidence in the dollar."

Governments and markets around the world are particularly worried about Trump's protectionist trade policy, which could lead to a decline in the value of the dollar. Toshima expects Asian emerging countries to keep buying gold in the coming months.

Countries with strained relations with the Trump administration, which is pursuing an "America first" policy agenda, are also expanding their purchases of gold.

In Iran, individual consumers' gold purchases are soaring. Sales of gold bullion and coins in the country during the first half of this year tripled from the same period last year to 24.5 tons, according to the World Gold Council.

Iranians are probably trying to protect their assets by canceling their dollar bank accounts and buying gold, since the sanctions will restrict Iran's transactions with U.S. banks, said Takashi Hayashida, founder and CEO of Elements Capital.

In Russia, which is also subject to U.S. economic sanctions, the central bank is boosting its gold hoard. The Russian central bank held 1,944 tons of gold in its vaults at the end of June, up 105 tons, or about 6%, since the end of 2017. Its gold holdings are now the fifth largest among the world's central banks.

Speculators have been selling gold futures in the market, causing gold prices to tank and creating a great opportunity for the Russian central bank to buy the metal.

Moscow is apparently seeking to guard itself against any economic impact of its soured ties with Washington by selling U.S. Treasurys and raising the ratio of gold in its foreign reserves.

Since gold is a highly liquid asset, meaning it can be readily converted to cash, it is sometimes referred to as an ATM, according to Toshima.

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