Central banks around the world are turning to gold as an alternative to the US dollar, which they see as being undermined by aggressive US trade policy and geopolitical uncertainty.

Demand for gold rose 42% year-on-year in the first quarter of 2018 among central banks, according to World Gold Council (WGC) statistics. Russia and Turkey are the largest net buyers.

Central banks added a net total of 193.3 tonnes of gold in the middle of 2018, an increase of 8% from the 178.6 tonnes bought in the same period last year. This marks the strongest 6 months for the central bank’s purchase of gold since 2015, notes the WGC.

Beginning in the first half of 2018, central banks increased their holdings in gold to $1.36 trillion, about 10% of international foreign currency reserves, the WGC said.

One analyst told Russian media that the reason behind the move is a desire to diversify from the dollar.

“The United States has long used the dollar to put pressure on competitors. This has always caused anger in the world community. And now the fight against the dollar has reached Europe,” said Eldiyar Muratov, President at Singapore Castle Family Office.

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“Russia has stepped up buying gold in its reserves in the face of new US sanctions and a possible disconnection from the dollar system,” added the analyst.

According to Muratov, a similar strategy is being observed in many countries in Europe and Asia. China, Turkey, Venezuela, Iran, Qatar and Indonesia are aiming at the de-dollarization of economies and foreign trade. All these countries are significantly increasing their gold reserves, said the expert.

As the WGC notes in its report, buying gold is not just about hedging currency risks.

“In an environment of heightened geopolitical tensions, gold is an attractive asset because it is not anyone else’s liability and does not carry any counterparty risk,” the report said.

“Gold is already a familiar asset class for central banks, but the changing nature of the gold market – with ever-growing consumption coming from developing economies – means that gold is increasingly aligned with emerging market economic patterns. Central banks may increasingly recognize that the rules of the game are changing.”

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