Demand for gold predicted to rise

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Demand for gold is likely to rise as the world heads towards a multi-currency reserve system under the impact of uncertainty about the stability of the dollar and the euro, the main official assets held by central banks and sovereign funds. This is the conclusion of a wide-ranging analysis of the world monetary system by Official Monetary and Financial Institutions Forum, (OMFIF), in a report commissioned by the World Gold Council, the gold industry’s market development body.

Driven by China’s desire to increase its financial influence, the Chinese renminbi is likely to emerge gradually as a genuine international currency as Beijing eases restrictions on its use in transactions and investments abroad. During the coming period of uncertainty and transition between different reserve currencies, official central bank asset managers around the world are likely to increase their interest in gold as a result of doubts about the overall strength of global monetary arrangements.

The OMFIF report explores the asset management consequences of greater dispersion of global economic power. It states: ‘The world is headed towards the uncharted waters of a durable multi-currency reserve system, where the dollar will share its pivotal role with a range of other currencies, including the renminbi.’

OMFIF believes the re-balancing of the world economy through China’s economic rise will occur gradually rather than abruptly and will not be straightforward. In particular, the move towards full renminbi convertibility is likely to be only gradual. Although the renminbi’s rise as a reserve currency is unlikely to pose any immediate threat to the dollar, ‘during this period of change and transition reserve holders will spread their investments into a relatively wide range of assets and sectors.’

While OMFIF does not envisage a return to a gold standard, the report says, ‘Gold will increasingly have a renewed role in the global monetary system, attracting a higher level of attention from policy-makers and financial market practitioners.’

According to Natalie Dempster, World Gold Council Director of Government Affairs:
‘The report makes a substantial contribution to the debate around the global transition to a multi-currency reserve system, with important implications for reserve asset managers. We are already seeing many of the world’s central banks increase the allocation of their reserves to gold and this report points to an acceleration of that trend.’

The OMFIF report includes a foreword by Prof. Lord (Meghnad) Desai, chairman of the OMFIF Advisory Board. He states: ‘As China weighs up its options for joining in the reserve asset game, gold – the official asset that plays no formal part in the monetary system, yet has never really gone away – is poised, yet again, to play a pivotal role.’

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