Central banks buying gold, is it the beginning of the end of the dollar?

Originally Posted On Publish0x

Gold is one of the most precious and coveted metals in history. Since ancient times, gold has been used as a symbol of wealth, power and prestige. Gold has also been used as a medium of exchange, a store of value and a unit of account. Gold, in short, has been and continues to be money.

However, in the 20th century, gold lost some of its prominence as an international currency. After World War II, the Bretton Woods system was established, which fixed the value of the U.S. dollar to gold and all other currencies to the dollar. Thus, the dollar became the world's reserve currency par excellence, and gold was relegated to a secondary role. But this system did not last long. In 1971, President Nixon announced the suspension of the convertibility of the dollar to gold, which meant the end of Bretton Woods and the beginning of a system of floating exchange rates. Since then, the value of the dollar and other currencies has depended on market supply and demand, as well as the monetary policies of central banks.

Central banks, which are the institutions in charge of managing countries' monetary reserves, have increased their purchases of gold in recent years at a rate unprecedented since 1950. In this context, gold has regained some of its appeal as a safe-haven asset and an alternative to the dollar. What are the reasons behind this phenomenon?

One reason is the search for greater diversification and security in their reserves. The dollar remains the dominant currency in international trade and financial investments, but it is also exposed to risks such as inflation, devaluation or political sanctions. Gold, on the other hand, does not depend on any government or entity to maintain its value, but is governed by supply and demand. Gold is also not devalued by inflation or monetary issuance, but tends to increase in price in times of crisis or uncertainty.

Another reason is the assertion of greater independence and sovereignty vis-à-vis the United States. Some countries, especially emerging countries or geopolitical rivals of the United States, see the dollar as a tool for interference on the part of the United States, which it also uses as a "weapon" of domination. The United States has the ability to impose economic sanctions on other countries or private companies that have dealings with them, which can negatively affect their interests. For example, Russia suffered greatly when the U.S. punished it for invading Ukraine. Buying gold is a way to reduce its dependence on the dollar and show its autonomy vis-à-vis this government.

A third motive is anticipation of a possible change in the international monetary order. Some analysts believe that the world is moving towards a multipolar system, where more countries want to have a say in global affairs. This may generate conflicts and tensions between emerging and established powers, as well as between different regions of the world. In this scenario, the dollar could lose some of its hegemony to other currencies such as the euro, the yuan or even bitcoin. Gold could be a common and neutral asset that facilitates cooperation and stability between countries.

The reality is that central banks continue to buy gold non-stop because they see it as a safe and profitable investment. Gold also has a value of its own apart from its price: it is durable, divisible and portable, which makes it ideal for use as money. Gold also allows them to diversify their reserves, hedge against dollar risks and prepare for a possible change in the global monetary system.

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Author's Note: The opinion expressed here is not investment advice, is provided for informational purposes only, and reflects the opinion of the author only. I do not promote, endorse or recommend any particular investment. Investments may not be right for everyone. Every investment in the market and every trade you make involves risk, so you should always do your own research before making any decision. I do not recommend investing money that you cannot afford to chair, as you could lose the entire amount invested.