Emerging economies may seek gold as dollar fears rise

John Irish and Luke Pachymuthu
Reuters
Monday, March 2, 2009


DUBAI -- Major emerging economies are seeking to raise their central banks' gold reserve holdings as fears of a sharp depreciation in the U.S. dollar mount, senior industry officials said on Monday.

Investors have been piling into gold as a safe haven as the the world's worst financial crisis since the 1930s depression sent global stock markets crashing.

"In this recession it is India and China that are going to grow at a slow rate, but they are growing," said Aram Shishmanian, chief executive officer of the World Gold Council.

"And they will naturally be looking to gold as part of their reserve asset management strategy, and I see them buying."

China, the biggest foreign holder of dollar-denominated treasury securities with some $681.9 billion or about 12 percent of treasury papers outstanding, could reverse that by paring its dollar holdings.

"China has $2 trillion of reserves, and only 1 percent in gold and nearly all of the rest is in U.S. dollars," said Marcus Grubb, managing-director of investment research and marketing at the industry-sponsored World Gold Council.

"What we are seeing is a reassessment of the risk associated with the high exposure to the dollar. Obviously at the moment you see the dollar appreciating 25 to 30 percent against most currencies around the world, but a lot of that is obviously driven by liquidity."

European central banks, which hold about half of global gold reserves, saw gold sales fall to their lowest levels since 1999, according to Grubb as governments store the precious metal as a buffer against worsening markets.

"Sales were underneath the Central Bank Gold Agreement cap. ... The cap was about 400 metric tonnes and I think they sold 356 tonnes. ... Something is going on."

Under the terms of the agreement, signed in 1999 by key European institutions including Germany's Bundesbank and the European Central Bank and renewed in 2004, members can sell up to 500 tonnes of gold a year.

The dollar hit a three-year high against a basket of six major currencies on Monday, with news that the U.S. government would pour a further $30 billion into troubled insurer AIG hastening risk-averse flows. The dollar index hit 88.822 -- its highest since April 2006.

But Grubb said the strength of the U.S. dollar is likely to be short-lived.

"That is a temporary phenomenon. If you look at the size of the bailout packages in North America the fact that the U.S. economy may well enter a depression ... there is a real fear of that," he said. "In that scenario I wonder what will happen to the U.S. dollar."

Such a decline would apply pressure on Gulf Arab states, which have faced popular pressure to ditch their currencies link to the greenback and switch to fight imported inflation when the dollar was weak.

"It would certainly be (a concern) to all regions pegged on the dollar. ... Because they have run surpluses, and the Western countries have been in deficits, they have huge accumulation of dollar reserves," Grubb said.

"In that scenario you could see an increased demand for gold then."

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