Foreign central banks purchased record amounts of gold in 2022. Many economists are signaling that the purchases are yet another sign of the decline of the petrodollar. Demand for gold, which is globally valued in U.S. dollars, increased 18% last year. The petrodollar is not an actual currency but is the amount of U.S. dollars traded for oil. Since the 1970s, the dollar has been the currency favored in the global oil trade, specifically through the Organization of Oil Producing Countries (OPEC).
A result of the sanctions against Russia by the United States in the wake of that country’s invasion of Ukraine has been closer ties between China and Russia. Saudi Arabia, the chief member of OPEC, recently signaled that the country is ending the longstanding policy of requiring dollars for oil trade and is open to accepting other currencies.
NEW: Saudi Arabia has inked an 80 billion yuan deal with China to build a Chinese oil refinery.
Are you paying attention yet?
Our adversaries are teaming up.
China is loading up on gold.
China and Russia have penned their alliance.
China has mediated a peace deal between…
— Collin Rugg (@CollinRugg) March 29, 2023
Geopolitical opponents of the U.S. have sought for years to open oil trades in other currencies. Since the invasion of Ukraine and the issuing of sanctions, Russia has been one of the leading purchasers of gold and is helping to drive the value of the petroyuan upward. Trade between the two nations has skyrocketed since 2021 and all signs point to a closer relationship between the two nations.
While this news is unsettling for market speculators, it does not indicate that the dollar itself is in decline. Over time, the opening of other currencies in the oil market will decrease the value of the dollar, but economists have been quick to warn about sounding the alarm bells. The dollar is still the dominant trading currency in the world and holds around 60% of the global supply of trade.
The largest impact of the decline of the petrodollar and the increase in gold purchasing by foreign banks will be on trade relationships the U.S. holds globally. As the petrodollar weakens, countries will be less willing to conduct trade on terms favorable to the U.S. This shift in political relationships could ultimately weaken the U.S. standing as the sole global superpower. Currently, the U.S. holds a massive amount of debt and the weakening of the petrodollar will only magnify the difficulties the government will have in the future.
The central banks of Turkey, China, India, Egypt, Qatar, Iraq, the UAE, and Oman led the world in bulk gold purchasing in 2022. In all, 4,741 tons of gold were sold and 1,136 tons were purchased by central banks. The banks bought 450 tons in 2021. If China is able to convince nations to begin trading for oil in yuan, the value of the currency will increase. Currently, one yuan is worth just $0.14.
