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  • Gold bars are seen at the Kazakhstan's National Bank vault in Almaty, Kazakhstan, Sept. 30, 2016.

    Gold bars are seen at the Kazakhstan's National Bank vault in Almaty, Kazakhstan, Sept. 30, 2016. | Photo: Reuters

Published 10 December 2019

The precious metal climbed to a six-year high in September as the Federal Reserve cut borrowing costs and the total pile of debt yielding less than zero climbed to a record US$17 trillion.

Central banks worldwide are consuming 20 percent global supply of gold as a part of a de-dollarization strategy - reducing the dollar’s dominance of global markets-, according to Goldman Sachs Group Inc.

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“De-dollarization in central banks - demand from central banks for gold is biggest since the Nixon era, eating up 20% of global supply,” the Head of Global Commodities Research at Goldman Jeff Currie told Bloomberg Monday. “I am going to like gold better than bonds because the bonds won’t reflect that de-dollarization.”

The precious metal climbed to a six-year high in September as the Federal Reserve cut borrowing costs and the total pile of debt yielding less than zero climbed to a record US$17 trillion, boosting the appeal of non-interest bearing gold. 

The uncertain economic scenario, caused by a deceleration in economic growth, a political crisis such as Brexit, and mainly the United States-China trade war has influenced this “fear-driven demand,” ditching the U.S. dollar in the process.  

“Going long-term depends on what is going to happen to global growth. The further out you go, the higher the probability that the U.S. is going to hit a recession. We have US$1,600 holding out through 2021,” Goldman Sachs analyst Mikhail Sprogis told Kitco News. Gold was trading at US$1463.30 per ounce on Tuesday.

Back in March, Bank of America Merrill Lynch analysts warned that although the U.S. dollar remains the dominant reserve currency, it is slowing using its status in the world. The bullion’s high demand comes primarily from large world economic players such as Russia, Turkey, China, among others. 

“Even though USD still accounts for 39.9 percent of international payments according to SWIFT, its market share has declined, as the global economy has become less U.S. and USD-centric,” the analysts said. “We believe that de-dollarization is an important factor behind the addition of gold to central bank gold reserves.”

Hedge funds and other large speculators boosted their bets on gold by 8.9 percent last week, government data showed Friday. 

“Gold cannot fully replace government bonds in a portfolio, but the case to reallocate a portion of normal bond exposure to gold is as strong as ever,” Goldman commented, adding that they “still see upside in gold as late-cycle concerns and heightened political uncertainty will likely support investment demand” for bullion as a defensive asset.

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