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Gold benefitting as Central Banks De-Dollarize

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NEW YORK: Although King Dollar isn’t about to lose its crown anytime soon, its influence is waning, which should provide some support for gold, according to the latest research from Bank of America Merrill Lynch (BoAML).

Analysts said Monday that although U.S. dollar remains the dominant reserve currency, it is slowing using its status in the world.

“Even though USD still accounts for 39.9% 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.”

Although Russia and China appear to be leading the de-dollarization trend, the analysts note that Europe is also jumping on to the diversification bandwagon.

“Adjusting to new economic realities, and rising importance of China, the ECB recently swapped €500 million U.S. dollar reserves into CNY-denominated securities,” the analysts said.

Looking at the gold market, BoAML said that gold is becoming an attractive reserve alternative as the U.S. dollar’s influence weakens.

Quoting a recent World Gold Council central bank survey, BoAML analysts said that one-fifth of central banks globally are looking to increase their gold holdings this year. At the same time, two-thirds of central banks value gold as a safe-haven asset. The survey also revealed that 59% of central banks acknowledged gold as an effective portfolio diversifier.

“Beyond those motivations, we believe that de-dollarization could also lead to rising share of gold holdings in gold portfolios,” the analysts said.

Although central banks have been net buyers of gold for the last nine years, their role in the gold market has come into sharper focus after a total of 651.5 tonnes of the yellow metal was bought in 2018, the most significant increase in roughly half a century.

Although reserve diversification has become an important topic for the gold market, BoAML also warned that investors shouldn’t expect to see a complete paradigm shift away from the U.S. dollar anytime soon.

“We believe the current de-dollarization trend is not necessarily unusual and could ultimately bring about more balanced global currency reserve portfolios,” the bank said. “That said, and considering the various advantages of U.S. financial markets, central banks need to find alternative assets to invest in, so the process will in all likelihood be evolving slowly.”

The comments come as the gold prices continue to hold above the critical psychological level at $1,300 an ounce. April gold futures last traded at $1,305.20 an ounce, up 0.18% on the day.

Many analysts are optimistic on gold as the U.S. dollar looks to weaken in 2019 as the nation deals with growing government deficits and looser monetary policy.

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