Central Bank Dollar Over-Exposure—Good for Gold, Bad for Dollar?


". . .potential erosion in global dollar confidence. . .almost always leads to increased willingness to invest in gold"

Figures from the U.S. Department of the Treasury show not only how the U.S. liabilities to other central banks have rocketed by 31% over the 11 months to May, but also that the balance of the maturities of these liabilities is shifting towards the short end as major counterparties increase their flexibility and de facto demonstrate their increasing levels of concern about over-exposure to the dollar.

This is, in principle, good for gold, not because it implies an outright reweighting towards gold in major nations' foreign exchange holdings, but because potential erosion in global dollar confidence and reluctance to retain dollar exposure almost always leads to increased willingness to invest in gold as a hedge against the dollar, risk and uncertainty.

In June 2008, the U.S.' total foreign liabilities to the official sector amounted to $1.7 trillion, with Japan the largest holder at 36% of total and China holding 36%. The current pecking order is China with 35% of total, followed by Japan (30%), the UK (7%), Brazil (5%) and Russia (5%) with the five between them accounting for 83% of total.

Chinese politicians and bankers have regularly expressed concern over dollar-heavy exposure and have espoused an increased role for the SDR in the international system. The trigger may be in 2011 when the voting powers of the IMF members are up for adjustment and there is a widespread push for the new voting tariffs more accurately to reflect international economic power.

None of this necessarily signifies a major tonnage shift towards gold; it may herald a fresh shift in sentiment regarding the dollar's role in the system. This is almost bound to lead to gold sustaining a yet higher profile, if only in the debate about reserve currencies and their relative merits.

Meanwhile the IMF is discussing the likely mechanics of the sale of those much-discussed 403.3 tonnes of gold that it is proposing to sell to aid the international funding process. The vote is likely to be taken in September, but with the new Central Bank Gold Agreement also under negotiation and due for implementation on 27th September this year, the logistics are likely to be decided before then.

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