In a recent article published on Yahoo Finance, Bloomberg macro strategist Simon White shed light on the growing trend of central banks accumulating gold reserves. According to White, this move is driven by concerns over the potential erosion of the dollar’s real value due to persistently large U.S. fiscal deficits and the looming threat of inflation.

White points out that while Federal Reserve Chair Jerome Powell may not be overly worried about inflation, as evidenced by his recent comments suggesting rate cuts later this year, other central banks are taking a more cautious approach. He argues that the new high in gold prices signals that global central banks are likely accumulating the precious metal to diversify away from the dollar.

The Bloomberg strategist highlights the broad and pronounced nature of gold’s recent move, with the metal making 50-year highs versus three-quarters of major developed market (DM) and emerging market (EM) currencies. White notes that after jewelry, private investment, including ETFs, bars, and coins, holds the largest share of gold holdings, followed by central banks’ official reserve holdings.

According to White, global central banks have continued to add to their gold holdings in the lead-up to the pandemic and again after the start of the Russia-Ukraine conflict, even as ETF investors, “perhaps dazzled by the bright lights of crypto,” have reduced their holdings. He notes that over the past six months, China, Germany, and Turkey have increased their gold holdings the most, with China’s true holdings likely much higher than officially stated.

White explains that central banks seek to hold gold as a hard asset that is not part of the financialized system when owned outright. However, he argues that the dominant reason for this preference is a desire to diversify away from the dollar. For countries not on friendly terms with the U.S., holding gold allows them to avoid having their reserve assets seized, as happened to Russia.

Furthermore, White suggests that central banks worldwide are likely uneasy about owning too many dollars when the U.S. is running large, inflation-causing fiscal deficits. He points out that the dollar is structurally overvalued on a purchasing-power-parity basis versus the main DM currencies and presents a chart indicating the potential for dollar underperformance in the coming years.

White concludes by noting that while investors in gold ETFs may not perceive significant risks from inflation and the dollar’s future, central bankers are signaling a very different sentiment through their actions.

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