According to a recent Invesco study, an increasing number of countries are prioritizing gold repatriation as a proactive measure against potential sanctions targeting Russia. This strategic move comes as sovereign money managers face the aftermath of a financial market rout, prompting a fundamental reevaluation of their investment strategies amidst expectations of higher inflation and ongoing geopolitical tensions.
As part of the annual Invesco Global Sovereign Asset Management Study, over 85% of the 85 participating sovereign wealth funds and 57 central banks expressed the belief that inflation in the coming decade will surpass levels witnessed in the past. In this environment, gold and emerging market bonds are gaining favor, with last year’s freezing of nearly half of Russia’s $640 billion gold and forex reserves by the West in response to the Ukrainian conflict triggering a notable shift in global gold allocation strategies.
The survey also revealed a “substantial share” of central banks expressing concerns over the precedent set by the sanctions. Approximately 60% of respondents indicated that the sanctions have made gold a more attractive asset, leading to a higher proportion (68%) of central banks opting to store their reserves domestically compared to 50% in 2020.
Notably, one central bank anonymously stated, “We did have our gold held in London… but now we’ve transferred it back to our own country to hold as a safe haven asset and to ensure its security.”
Rod Ringrow, Head of Official Institutions at Invesco and overseer of the report, highlighted the prevailing sentiment among central banks, stating, “‘If it’s my gold, then I want it in my country’ has been the mantra we have witnessed over the past year or so.”
Beyond safeguarding against Russian sanctions, geopolitical concerns and emerging market opportunities are driving central banks to diversify away from the U.S. dollar. While most central banks still view the dollar as the world’s reserve currency, a growing 7% perceive rising U.S. debt as a negative factor. The belief that China’s yuan could emerge as a contender has declined from 29% to 18% compared to the previous year.
Geopolitical tensions emerged as the foremost risk over the next decade, as noted by nearly 80% of the 142 surveyed institutions. Additionally, 83% expressed concerns about inflation within the next 12 months. Infrastructure projects, particularly those involving renewable energy generation, are now viewed as the most attractive asset class.
While concerns over China impact investment preferences, India remains a top choice for investment for the second consecutive year. The “near-shoring” trend, where companies establish factories closer to their target markets, is boosting countries such as Mexico, Indonesia, and Brazil. Conversely, China, Britain, and Italy are perceived as less attractive investment destinations. Rising interest rates coupled with the work-from-home and online shopping habits ingrained during the COVID-19 outbreak have caused property to become the least attractive private asset.
Ringrow emphasized the importance of recognizing the risks posed by inflated asset prices and being open to substantial portfolio changes. As central banks and wealth funds confront the challenge of higher inflation, he described this shift as a significant industry-wide transformation.
The increasing number of countries participating in gold repatriation reflects a growing sense of insecurity and concern over geopolitical tensions and potential sanctions. This move suggests a lack of trust in global financial systems and a desire to safeguard national assets, signaling a worrisome trend of heightened uncertainty and potential economic instability in the future.
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#Russia #Ukraine #West #sanctions #gold #goldreserves #forex #goldrepatriation #dedollarization #inflation #diversification #investing #USdollar #China #India #geopolitics
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