Weaponized US dollar may drive central banks to diversify their holdings of gold, crypto

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According to one precious metals group, a weaponized US dollar as Russia's war with Ukraine enters its fifth week could generate greater possibilities for gold or crypto.

In studies issued on Wednesday and Thursday, Nicky Shiels, head of metals strategy at MKS PAMP Group, emphasized the impact that prolonged Western sanctions against Russia might have on the global economy and the dollar's function as a reserve currency.

"Depending on whether the West succeeds or fails, the more they are utilized or the longer sanctions are applied, the more other nations will strive to avoid relying on Western funding," she stated in the paper.

Shiels stated that when it comes to the function of the US dollar in the global economy, it remains the largest currency held by central banks, accounting for roughly 60% of world reserves. She also stated that the US dollar is involved in 90% of daily trades in the $6.6 trillion foreign exchange market.

"There are existing alternatives," she continued, "but none now match the US$ in size, depth, and esteem." Despite the fact that the gold market is still too small to completely replace the dollar, Shiels believes central banks can utilize it to diversify away from the US dollar.

Shiels pointed out that in a vote made by the United Nations General Assembly requesting that Russia end its invasion of Ukraine, 35 countries abstained and five countries voted against the resolution.

She went on to say that these 40 countries own a total of 193 million ounces of gold. She explained that gold and crypto "may be monetized and sold off-market (bearish) or scaled up in order to further de-dollarize (bullish) in an effort to minimize reliance on the US$ and hence the Western banking system."

"If those countries considered Russian friends were to change their gold reserves and put them in line with the present criteria of 17 percent, they would collectively need to buy an additional 290 million oz of gold," she noted in an updated note Thursday. "That's 2.6 times the total size of all ETF holdings. Given the amount of its deposits, China would need to buy 260 million ounces, India +33 million ounces, and Bangladesh 3.9 million ounces."

While the US dollar is unlikely to lose its reserve status anytime soon, Shiels pointed out that superpowers do not emerge overnight.

Simultaneously, Shiels stated that gold faces certain headwinds as nations and individuals contend with rising inflation.

"Food crises and the concomitant surge in inflation are often positive for gold as an investment, but only to a point. If it has a significant influence on the discretionary income of poorer gold-consuming countries, not only is consumer demand hampered, but gold holdings/savings could potentially be freed "She stated.

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